Navigating the Letter of Intent: 5 “Gotcha” Clauses That Can Hurt a Seller During the Exclusivity Period

The letter of intent is the document that most sellers treat as a cause for celebration. The offer has been evaluated, the preferred buyer has been selected, and both parties have agreed on the 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: they sign the LOI without reading it carefully enough, without understanding the specific provisions that will govern the next sixty to ninety days, and without appreciating that several of those 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 in the period between signing and closing: the exclusivity obligation (which prevents the seller from talking to other buyers) and the conduct of business covenant (which governs how the seller can operate the company during diligence). Everything that happens after the LOI—due diligence, purchase agreement negotiation, closing adjustments—occurs in the shadow of these provisions. Understanding the five most consequential gotcha clauses before you sign is essential.

Gotcha #1: Broad and Lengthy Exclusivity Periods

The exclusivity clause in an LOI grants the buyer a defined period—typically 45–90 days, though buyers frequently push for 90–120—during which the seller cannot solicit, encourage, or engage with other potential acquirers. During this period, the competitive tension that drove the buyer to their initial offer price evaporates. The buyer knows they have exclusive access to the deal; there is no risk of a competing party submitting a better offer. That shift in negotiating dynamics is precisely what makes exclusivity valuable to buyers and costly to sellers.

The gotcha here is not that exclusivity exists—some exclusivity is reasonable and necessary for a buyer to invest in diligence—but that sellers often agree to exclusivity periods that are longer than necessary, with insufficient protections against buyer delays that extend the effective exclusivity period beyond its stated duration. A buyer who commits to a 60-day diligence process but raises new issues in week seven, requests document extensions in week nine, and delivers a redlined purchase agreement in week eleven has effectively extended exclusivity well beyond 60 days without the seller’s explicit consent.

Negotiate the exclusivity period carefully:A reasonable LOI exclusivity period in the lower middle market is 45–60 days for a well-prepared seller with organized documentation. Buyers who request 90 days should be asked to explain why their diligence requires that timeline. Additionally, sellers should negotiate a provision that automatically terminates exclusivity if the buyer has not delivered a substantially complete draft purchase agreement by a defined date—converting the exclusivity period from an indefinite obligation into a time-bounded one with buyer accountability.

Gotcha #2: The Working Capital Target and Adjustment Mechanism

The working capital provision in an LOI establishes the “target” net working capital that the seller is obligated to deliver at closing, with dollar-for-dollar purchase price adjustments for any shortfall or surplus relative to that target. This mechanism is legitimate and standard, but the specific target and methodology embedded in the LOI can significantly affect the seller’s final proceeds—and buyers almost always propose these terms in a way that favors their position.

The most common working capital gotchas are: a target calculated as the trailing twelve-month average of monthly working capital, without seasonality adjustment, which can require the seller to deliver an above-normal working capital level if the measurement period includes peak months; a definitional scope that includes items the seller expected to exclude (like certain accruals or related-party balances) or excludes items the seller expected to include; and an accounting methodology provision that references GAAP without specifying which particular accounting elections will be used in the closing calculation, creating disputes later about which approach applies.

Working capital disputes are common and expensive:Working capital adjustment disputes are among the most frequent and costly post-closing issues in lower middle market M&A. A disputed $300,000 working capital adjustment can cost both parties $150,000 or more in legal and accounting fees to resolve, on top of the economic impact of the adjustment itself. Negotiating detailed, precise working capital definitions in the LOI—rather than leaving them to the purchase agreement—reduces the risk of these disputes substantially.

Gotcha #3: Broad “No-Shop” Language That Extends to Unsolicited Approaches

The no-shop clause prevents the seller from seeking alternative buyers during the exclusivity period—which is expected and reasonable. The gotcha version of this clause is the “no-talk” provision, which extends the prohibition to prevent the seller from even responding to unsolicited approaches from third parties. If a strategic acquirer approaches the seller independently during the exclusivity period with a superior offer, a broadly drafted no-talk clause can prevent the seller from even acknowledging the approach, let alone evaluating it.

Sellers should negotiate the no-shop clause to permit—but not require—responses to unsolicited approaches that are clearly superior to the terms of the signed LOI. This fiduciary out is standard in public company transactions and is increasingly accepted in sophisticated lower middle market deals. It does not require the seller to actively seek alternatives but preserves the right to respond if the market produces a genuinely better opportunity.

Gotcha #4: Earnout Language That Transfers Future Risk to the Seller

When an LOI includes an earnout provision, the specific language used to describe the earnout metric, measurement period, and calculation methodology in the LOI will heavily influence—or in some cases determine—the final purchase agreement earnout terms. Buyers who are skilled at LOI drafting will include earnout language that appears seller-friendly on its face but that contains ambiguities or buyer-favorable defaults that become apparent only when the purchase agreement is drafted.

The most consequential earnout gotchas are: metrics defined as “EBITDA” without specifying which adjustments are included or excluded, leaving the buyer to argue for a more restrictive definition during purchase agreement negotiation; measurement periods that begin at closing rather than at the start of a fiscal year, creating partial-period complications; and missing provisions about what the buyer is required to do (or not do) to maintain the earnout’s achievability. Earnout language in the LOI should be as specific as the earnout language in the purchase agreement—because it will largely become the purchase agreement language.

Gotcha #5: The “Material Adverse Change” Termination Right

Most LOIs include a provision allowing the buyer to terminate the agreement if a material adverse change (MAC) occurs in the business between signing and closing. MAC provisions are legitimate—they protect buyers against genuine business deterioration that makes the acquisition thesis untenable. The gotcha version of a MAC clause is one that is defined so broadly that normal business fluctuations—a quarter of revenue below the prior year, the departure of a key employee, a customer who reduces order volume—could be argued to constitute a material adverse change.

Sellers should negotiate MAC definitions that exclude ordinary course business events, require a threshold of business impact before the clause can be triggered, and specify that the change must be both material and adverse to the business’s long-term prospects—not just a transient fluctuation. A well-negotiated MAC clause protects the buyer against genuine catastrophe while giving the seller protection against tactical use of the clause to renegotiate terms or create leverage for price reductions that would not otherwise be justified.

Frequently Asked Questions

What is a letter of intent (LOI) in a business sale and is it legally binding?

A letter of intent is a document in which a buyer expresses their intent to acquire a business on specified terms, subject to the completion of due diligence and the execution of a definitive purchase agreement. The LOI is generally non-binding on price and most material terms—neither party is legally required to complete the transaction. However, certain specific provisions—most importantly the exclusivity clause and the conduct of business covenant—are typically binding and enforceable. These binding provisions govern the most consequential period of the transaction, between signing and closing.

What is an exclusivity period in an LOI and how long should it be?

An exclusivity period is the defined window after LOI signing during which the seller agrees not to solicit, encourage, or engage with other potential buyers. It allows the buyer to invest in due diligence with confidence that the opportunity will not be lost to a competitor. A reasonable exclusivity period in the lower middle market for a well-prepared seller is 45–60 days. Buyers who request 90–120 days should be asked to explain why their diligence requires that timeline. Sellers should also negotiate provisions that terminate exclusivity automatically if the buyer fails to deliver a substantially complete purchase agreement by a defined date.

What is the working capital adjustment in an LOI and why does it matter?

The working capital adjustment provides that the purchase price will be adjusted, dollar for dollar, based on the difference between the actual net working capital delivered at closing and a “target” level established in the LOI. If the business delivers less working capital than the target, the seller receives less consideration; if it delivers more, the seller receives more. The specific target and the methodology for calculating working capital can significantly affect the seller’s actual proceeds, and buyers typically propose these terms in their favor. Sellers should negotiate working capital definitions carefully in the LOI rather than leaving them to the purchase agreement.

What is a no-shop clause and how is it different from a no-talk clause?

A no-shop clause prevents the seller from actively seeking alternative buyers during the exclusivity period—it prohibits solicitation of competing offers. A no-talk clause is more restrictive: it prevents the seller from even communicating with parties who approach them unsolicited during exclusivity. Sellers should negotiate for no-shop language rather than no-talk, and should preserve a fiduciary out that allows them to respond to unsolicited approaches that are clearly superior to the LOI terms without triggering a breach.

What should earnout language in an LOI include?

Earnout language in the LOI should specify: the precise performance metric being measured (with enough definition that disputes about interpretation are minimized); the measurement period and whether it aligns with fiscal years; the accounting methodology to be used in calculating the metric; the specific buyer obligations regarding management of the business during the earnout period; and the dispute resolution mechanism if the parties disagree on the earnout calculation. Vague earnout language in the LOI almost invariably benefits the buyer during purchase agreement negotiation, when the seller has already committed to exclusivity.

What is a material adverse change (MAC) clause and how should sellers negotiate it?

A material adverse change clause gives the buyer the right to terminate the transaction if the business experiences a significant negative change between LOI signing and closing. MAC clauses are standard and legitimate, but sellers should negotiate definitions that exclude ordinary course business fluctuations, require a threshold of impact before the clause is triggered, and focus on changes that are both material and adverse to the long-term business rather than transient operational variations. A well-negotiated MAC clause protects the buyer from genuine catastrophe without providing a pretext for tactical renegotiation.

How can Blackland Advisors help me navigate the LOI negotiation?

Blackland Advisors manages the LOI negotiation on behalf of lower middle market sellers, reviewing every provision for buyer-favorable language, negotiating exclusivity periods, working capital definitions, earnout terms, MAC clauses, and no-shop language, and ensuring that the LOI preserves the seller’s negotiating position for the definitive agreement. We have navigated hundreds of LOI negotiations and know exactly where the value is created and destroyed in each provision. If you are approaching an LOI negotiation and want experienced representation, we welcome a confidential conversation.

The LOI is where many deals are won or lost. Don’t sign it alone.

Contact Blackland Advisors for expert guidance on the LOI provisions that matter most to your final outcome.