The letter of intent is the document most sellers treat as a cause for celebration. The offer has been evaluated, the preferred buyer selected, and both parties have agreed on essential terms. The deal feels done. And in that moment of relief, sellers often do the one thing that will cost them the most money in the entire transaction: sign the LOI without appreciating that several of its provisions are designed to shift economic risk from the buyer to the seller.
The LOI is non-binding on price and most material terms, but it is binding on the two things that matter most between signing and closing: the exclusivity obligation, which prevents talking to other buyers, and the conduct of business covenant. Our guide to the seven phases of a successful business sale maps where the LOI fits in the full journey.
Gotcha #1: Broad and Lengthy Exclusivity Periods
Exclusivity typically runs 45–90 days, though buyers frequently push for 90–120. During this period, the competitive tension that drove the initial offer price evaporates entirely. The gotcha isn't that exclusivity exists, it's that sellers agree to periods longer than necessary, with insufficient protection against buyer delays that extend the effective period well beyond its stated duration.
The moment you grant exclusivity, the competitive tension that produced your offer price disappears. Every week of unnecessary exclusivity is a week in which the buyer can renegotiate with no consequence.
Negotiate the exclusivity period carefully: 45-60 days is reasonable for a well-prepared seller. Buyers requesting 90 days should explain why. Negotiate automatic termination if the buyer hasn't delivered a substantially complete draft purchase agreement by a defined date. Sellers who've done the preparation work in our guide on how to prepare your financials for a business sale consistently get shorter timelines.
Gotcha #2: The Working Capital Target and Adjustment
This provision establishes the target net working capital the seller must deliver at closing, with dollar-for-dollar adjustments for shortfall or surplus. Common gotchas: a trailing-twelve-month average with no seasonality adjustment; a definitional scope that quietly excludes or includes items differently than expected; and an accounting methodology that references GAAP without specifying which elections apply.
Working capital disputes are among the most frequent and costly post-closing issues in lower middle market M&A. A disputed $300,000 adjustment can cost both parties $150,000 or more in legal and accounting fees to resolve.
Negotiating precise definitions in the LOI, informed by the financial preparation covered in our guide on how to prepare your financials for a business sale, rather than leaving them to the purchase agreement, reduces dispute risk substantially. Working capital is one of the core factors in what determines your business's valuation, getting it right before the LOI is signed ripples through the entire transaction.
Gotcha #3: Broad "No-Shop" Language That Extends to Unsolicited Approaches
A no-shop clause preventing active solicitation of alternative buyers is expected and reasonable. The gotcha version, a "no-talk" provision, prevents even responding to unsolicited approaches. If a strategic acquirer approaches independently with a superior offer, a broad no-talk clause can prevent even acknowledging it.
The distinction that matters: a no-shop clause stops you from shopping the deal. A no-talk clause stops you from listening. Accept the former, resist the latter, preserving the right to evaluate a materially superior unsolicited approach with appropriate notice to the current buyer.
Our guide on finding the right buyer for your business covers strategic versus financial buyers and how competitive tension is maintained throughout a well-managed process.
Gotcha #4: Earnout Language That Transfers Future Risk to the Seller
The earnout language in the LOI heavily influences, or effectively determines, the final purchase agreement terms. The most consequential gotchas: metrics defined as "EBITDA" without specifying included or excluded adjustments; measurement periods starting at closing rather than a fiscal year start, creating partial-period complications; and missing provisions about what the buyer must (or must not) do to keep the earnout achievable.
Sellers who grant exclusivity based on vague earnout terms frequently discover every ambiguity resolves in the buyer's favor during purchase agreement negotiation, when they have no competing leverage. Our complete guide on what an earnout is explains the protective language to insist on before granting exclusivity. Our guide on what EBITDA is explains why a vague EBITDA reference in the LOI is a dispute waiting to happen.
Gotcha #5: The Material Adverse Change Termination Right
MAC provisions legitimately protect buyers against genuine business deterioration. The gotcha version is defined so broadly that normal fluctuations, a soft quarter, a key employee's departure, a customer trimming order volume, could be argued to qualify.
Why MAC clauses get weaponized: a buyer with cold feet, for market or financing reasons, may look for a MAC argument to exit or force a price reduction without admitting the real reason. The more precisely the MAC is defined, the harder it is to invoke opportunistically. Specificity is the seller's best protection.
MAC exposure is amplified for sellers with concentrated revenue, a single large customer reducing orders could trigger a broad MAC argument. This is one more reason the risk factors in our post on the five most common deal-killers are worth addressing before going to market.
Why the LOI Is Where Many Deals Are Won or Lost
Each gotcha above is almost entirely preventable with experienced representation during LOI negotiation. The LOI phase feels like the end of the negotiation because the headline price is agreed. In reality, it's the phase where value is most commonly eroded, exclusivity granted, competing buyers turned away, leverage peaked and not returning absent buyer bad faith severe enough to justify termination.
Sellers who enter the market without a clear picture of normalized EBITDA, working capital baseline, and deal structure priorities, including the asset sale vs. stock sale decision covered in our guide on asset sale vs. stock sale tax implications, are negotiating blind exactly when clarity matters most. Our post on the cost of waiting to sell your business makes the case for why preparation time is the most valuable time in the process, and our post on how to know when it's the right time to sell helps you evaluate whether you're approaching that window prepared. Our guide on the quality of earnings report explains how the LOI's definitions become the measuring sticks for the buyer's QoE review.
The LOI is where many deals are won or lost. Don't sign it alone.