The most important document you’ll sign in your sale, and the one most owners sign before they call a lawyer.

Here’s the uncomfortable truth about the letter of intent.

It’s the document owners take least seriously and the document that decides the most.

By the time most sellers call me, it’s signed. And the conversation I have to have is not about what we’re going to negotiate. It’s about what we no longer can.

What an LOI actually is

A letter of intent is the buyer’s written statement of the deal he wants to do. Price, structure, timing, and the major terms, usually in two to five pages. Sometimes it’s called a term sheet or a memorandum of understanding. The name doesn’t change what it does.

It is not the purchase agreement. It doesn’t transfer anything. And it’s usually described as non-binding.

That description is where owners go wrong.

The word “non-binding” is doing a lot of work

Most of an LOI is non-binding in the strict legal sense. Nobody has to close. The price can move.

But there are almost always provisions in it that are binding, and they’re the ones that cost you. Look for these:

• Exclusivity, sometimes called a no-shop. You agree to stop talking to other buyers for a stated period. Binding.
• Confidentiality. Usually binding, and usually fine.
• Access to diligence. You agree to open your books and your business. Binding.
• Expenses. Who pays for what if the deal dies. Sometimes binding, and occasionally worse than you’d guess.
• Governing law and disputes. Binding, and it decides where you’d fight if you had to.
• Break fees or earnest deposits. Not common in smaller deals, binding when present, and worth reading twice.

So the honest way to describe an LOI is this. The parts that favor you are non-binding. The parts that constrain you are binding.

That is not a conspiracy. The buyer’s lawyer drafted it, and that’s his job.

Exclusivity is a clock on your leverage

The single most consequential provision in the document.

Exclusivity means that for the next 30, 60, or 90 days you cannot talk to another buyer. Your competitive process is over. If this buyer walks in week nine, you restart from zero, months older, with a business that’s been distracted and a broker who now has to explain to the next buyer why the last one left.

The buyer knows all of that. Which is why the moment you sign, the balance of power in your deal inverts.

What to negotiate before you agree to it:

• Make it as short as the deal honestly needs. If diligence takes 60 days, don’t grant 120. You can always extend.
• Tie extensions to something. An extension by mutual agreement is fine. An automatic extension is not.
• Put milestones in it. Diligence list delivered by a date. Financing commitment by a date. Draft purchase agreement by a date. Miss a milestone, exclusivity ends.
• Ask what’s behind the money. If the buyer needs a bank, ask for the lender’s name and where the application stands before you hand him your exclusivity.
• Say what happens if he retrades. If the buyer materially lowers his price after diligence, exclusivity should end so you can go talk to somebody else.

That last one is the clause almost nobody asks for and the one I want most.

Settle these in the LOI, not after

Every term you leave general becomes the buyer’s opening draft. Every term you don’t mention is a term you’re raising later, after your leverage is gone.

That’s a lot to negotiate before anyone has done diligence. Do it anyway.

Each of those is easy while the buyer still has competition and nearly impossible after he doesn’t. An afternoon spent on this list is the highest-paid afternoon of your entire sale.

Working capital, because it surprises everyone

Buyers expect the business to arrive with enough cash, receivables and inventory to keep running on day one. That’s reasonable. What isn’t reasonable is discovering it at closing.

Here’s how it goes wrong. The LOI says the business will be delivered with a “normal level of working capital.” Nobody defines normal. Ninety days later the buyer’s accountant produces a number built from a trailing twelve-month average that happens to include your busiest season, and you’re handed a bill at settlement for hundreds of thousands of dollars you’d already spent in your head.

Fix it in the LOI. Name the target. Name the formula. Name the measurement date and who calculates it. Say what happens if the number lands above the target, because that money should come back to you and often quietly doesn’t.

What not to put in an LOI

Two things.

Don’t agree to a price without saying what it’s contingent on. A number with no conditions attached reads as a commitment, and the buyer will treat any later change as you moving the goalposts.

And don’t let the LOI describe reps and warranties as “customary” and leave it there. Customary in whose deals? That word has cost sellers real money, because the buyer’s lawyer will tell you later that uncapped indemnity is customary in his practice, and now you’re arguing about vocabulary instead of terms.

When the buyer retrades

Retrading is when the buyer lowers his price after diligence.

Sometimes it’s legitimate. A quality of earnings analysis comes back and your add-backs didn’t hold, or a real problem surfaced. That’s a negotiation, and it’s fair.

Sometimes it’s a tactic. Diligence runs long, you’re exhausted, you’ve told your key people, you’ve mentally spent the money, and the number drops eight percent in week ten over something small. The buyer is counting on the fact that you have nowhere to go.

You can tell the difference by asking one question: what specifically changed, and show me the work.

A legitimate retrade comes with a number and an analysis. A tactical one comes with a feeling.

Your protection against both is built at the LOI. Short exclusivity. Milestones. A retrade clause that frees you. And a buyer you qualified before you gave him the keys.

A note on Texas

Texas has no state income tax, which makes the allocation of your purchase price the whole game on the tax side. There’s no state layer blurring the line between capital gain and ordinary income. If the LOI is going to say anything about allocation, and it should at least say the parties will agree on one, get your CPA in the conversation before you sign rather than after.

The other Texas point worth knowing: a non-compete given as part of selling a business is treated far more favorably by courts than one signed by an employee, because it’s tied to the goodwill you sold. Expect to sign one and expect it to hold. So the scope you agree to in the LOI is very likely the scope you live under for years. Negotiate the geography and the definition of the restricted business as carefully as you negotiate price.

The five-minute LOI review

Before you send it to me, run it yourself. Find the answer to each of these in the document. If you can’t find it, that’s the finding.

Eleven questions. If the document answers all eleven, you have a real LOI. If it answers four, you have a buyer’s wish list with a signature line.

Frequently Asked Questions

Is a letter of intent binding?

Parts of it usually are. Exclusivity, confidentiality, diligence access, expenses and governing law are commonly binding even in an LOI labeled non-binding. Read which paragraphs say so, because the document will tell you.

Can I back out after signing an LOI?

Generally yes on the deal itself, since the price and the closing are usually non-binding. What you can’t back out of is the exclusivity you granted, and that’s the part that costs you.

Should I have a lawyer review the LOI before I sign it?

Yes. It’s the single highest-value hour in your entire transaction. Everything is negotiable before you sign and almost nothing is after.

How long should exclusivity be?

As short as the deal honestly needs, commonly 30 to 90 days, with milestones the buyer has to hit and a clear end if he doesn’t. You can always extend. You can’t take it back.

What if the buyer won’t negotiate the LOI?

That tells you something about how the rest of the deal will go. A buyer who won’t discuss terms while you still have alternatives will not become more flexible after you’ve given them up.

Can I sign an LOI with more than one buyer?

Not if you’ve granted exclusivity, and that’s the point of the clause. Before you sign, that’s exactly when you should be talking to everyone.

Who writes the LOI?

Usually the buyer. That’s not a problem by itself. It does mean every ambiguity in it was written by someone who isn’t working for you.

My broker gave me an LOI template. Is that enough?

A template is a starting structure, not a review of your deal. It doesn’t know your customer concentration, your assignment clauses, or what your non-compete should say. Read more on what a broker does versus what an attorney does.

What happens after the LOI is signed?

Due diligence, then the purchase agreement, then closing. The full process is laid out here.

One Hour. One Price.

If you have an LOI on your desk right now, that’s the call to make today.

Sixty minutes on the phone. I’ll read it, tell you what’s binding, tell you what’s missing, and tell you what I’d push back on before you sign.

It costs $1,000.

Most business owners get one shot at their exit. One. The cheapest hour you’ll spend on it.

This page is general information about how business sales work in Texas. It isn’t legal advice and reading it doesn’t make me your lawyer. Every deal is different, and the details are where the money is.