Letter of Intent (LOI): How to Draft & Negotiate

The Letter of Intent is the key document in any search fund acquisition. It marks the transition from the search phase to the deal phase and sets the framework for everything that follows ,due diligence, acquisition financing, and the definitive purchase agreement. A well-drafted LOI protects the buyer, reassures the seller, and establishes the commercial terms that will govern months of negotiation.

What an LOI is and why it matters

An LOI (also called a term sheet or indication of interest) is a document that outlines the proposed terms of an acquisition before both parties commit to the expense and effort of full due diligence and legal documentation. It is primarily non-binding, meaning neither party is legally obligated to complete the transaction. However, certain provisions, exclusivity, confidentiality, and expense allocation, are typically binding.

The LOI matters for several reasons. First, it forces both parties to agree on the material terms before investing significant time and money. Second, the exclusivity provision prevents the seller from shopping the deal while you conduct diligence. Third, it gives your investors and lenders confidence that a deal is progressing, which is essential for lining up acquisition financing. Fourth, it establishes the negotiating dynamic, the tone and structure of the LOI often set the pattern for the entire deal process.

Key sections of an LOI

1. Purchase price and valuation

State the proposed enterprise value and how you arrived at it (e.g., a multiple of trailing twelve months adjusted EBITDA). See our guide on business valuationfor more on choosing the right methodology. Specify whether the price is fixed or subject to a working capital adjustment at closing. Many search fund LOIs express the price as a range (“€5.0M-€5.5M, subject to confirmatory due diligence”) to preserve negotiating flexibility while giving the seller a clear indication.

2. Transaction structure

Specify whether you are proposing an asset purchase or a share purchase. Asset purchases are more common in the US (favorable tax treatment for buyers, ability to select assets and exclude liabilities). Share purchases are more common in Europe, particularly in France and Germany, where asset transfers can trigger complex employment and contract assignment issues. Include the anticipated form of consideration: cash at closing, seller notes, earn-outs, or a combination.

3. Exclusivity (no-shop period)

The exclusivity clause is arguably the most important binding provision. It prevents the seller from soliciting or entertaining competing offers during the due diligence period. Typical exclusivity periods range from 60 to 120 days. Push for 90-120 days , search fund acquisitions require extensive diligence, financing arrangements, and investor coordination. Include an extension mechanism (e.g., automatic 30-day extension if diligence is proceeding in good faith) to avoid the pressure of an arbitrary deadline.

4. Due diligence

Outline the scope and process for due diligence. Specify that the buyer will have full access to financial records, contracts, employees (typically after a certain milestone), customers, and facilities. State that the transaction is contingent on satisfactory completion of due diligence, this gives you an exit ramp if you discover material issues. Be explicit about what “satisfactory” means: it should be at the buyer's sole discretion.

5. Conditions to closing

List the conditions that must be satisfied before the transaction can close:

• Financing contingency: The acquisition is subject to the buyer securing adequate debt and equity financing. This is standard in search fund deals.
• Board/investor approval: For traditional search funds, the acquisition requires approval from search fund investors.
• Regulatory approvals: Anti-trust clearance, industry-specific licenses, or foreign investment approvals as applicable.
• No material adverse change: The business has not suffered a significant deterioration between LOI signing and closing.
• Key employee retention: Certain critical employees must agree to remain with the business post-closing.
• Seller transition: The seller agrees to a post-closing transition period (typically 6-12 months).

6. Seller note and earn-out terms

If part of the consideration is deferred, specify the terms. For seller notes, include the principal amount, interest rate, maturity, amortization schedule, and subordination terms (the seller note is almost always subordinated to senior bank debt). For earn-outs, define the performance metrics (revenue, EBITDA, customer retention), measurement period, and payout formula. Earn-outs are notoriously difficult to negotiate, keep the metrics simple and objectively measurable.

7. Confidentiality and announcements

Both parties agree to keep the transaction confidential until closing. No public announcements without mutual consent. This protects the business from employee anxiety, customer uncertainty, and competitor opportunism during the diligence period.

Binding vs. non-binding provisions

Understanding this distinction is critical. The LOI should explicitly state which provisions are binding and which are not:

• Typically binding: Exclusivity, confidentiality, expense allocation (each party bears its own costs), governing law, and dispute resolution.
• Typically non-binding: Purchase price, transaction structure, closing conditions, representations and warranties, and indemnification terms.

Be cautious about making the purchase price binding. While sellers may push for this, a binding price before due diligence is complete removes your ability to renegotiate if you discover material issues. The standard practice is to keep the price indicative and non-binding, with the definitive purchase agreement setting the final terms.

Break-up fees and cost reimbursement

Some sellers request a break-up fee - a payment the buyer must make if the buyer walks away from the deal after signing the LOI. Break-up fees are uncommon in search fund transactions but occasionally appear in competitive processes where the seller wants compensation for taking the company off the market. If you agree to a break-up fee, keep it modest (typically 1-2% of the purchase price) and ensure it is only triggered by the buyer's voluntary withdrawal - not by a failure to obtain financing or the discovery of material misrepresentations during diligence. Cost reimbursement provisions, where the withdrawing party reimburses the other side's out-of-pocket expenses, are more common and generally more reasonable. These provisions should be capped at a specific dollar amount to limit exposure.

Exclusivity period negotiation

The exclusivity (or "no-shop") provision is often the most negotiated binding term in the LOI. Getting it right protects your investment of time and money during the diligence period.

Duration and extensions

Typical exclusivity periods in search fund acquisitions range from 60 to 90 days, though complex transactions may warrant 120 days. The right duration depends on the complexity of the business, the scope of diligence required, and the time needed to arrange acquisition financing. Push for the longest period the seller will accept - rushing diligence to meet an artificial deadline is one of the most common causes of post-acquisition surprises. Include an extension mechanism in the LOI, such as an automatic 30-day extension if diligence is proceeding in good faith and neither party has raised material concerns. This prevents the seller from using an expiring exclusivity period as use to force premature commitment.

What happens when exclusivity expires

If exclusivity expires without an extension, the seller is free to entertain competing offers. This does not necessarily mean the deal is dead - many sellers prefer to continue with the existing buyer rather than restart the process - but it dramatically weakens your negotiating position. You have invested significant time and professional fees, and the seller knows you have sunk costs that create pressure to close. To avoid this dynamic, monitor your exclusivity timeline closely, communicate proactively with the seller about diligence progress, and request extensions before the deadline arrives rather than after.

Common negotiation points beyond price

While purchase price gets the most attention, several other LOI terms have significant economic and operational impact. Understanding these terms before you draft the LOI prevents costly surprises during purchase agreement negotiations.

Working capital peg

The working capital peg (or "target") is the agreed-upon level of net working capital that the seller must deliver at closing. If actual working capital at closing falls below the peg, the purchase price is reduced dollar-for-dollar; if it exceeds the peg, the price increases. The peg is typically set as the trailing twelve-month average of net working capital, though seasonal businesses may require a different calculation methodology. Getting the working capital peg wrong can shift hundreds of thousands of dollars between buyer and seller - it deserves careful analysis during diligence and explicit treatment in the LOI.

Representations, warranties, and indemnification

The LOI should outline the expected scope of representations and warranties (reps) that the seller will make in the definitive purchase agreement. Key reps cover the accuracy of financial statements, the absence of undisclosed liabilities, compliance with laws, the status of material contracts, and the condition of assets. The indemnification provisions determine what happens when a rep proves untrue - the seller must compensate the buyer for resulting losses. Two critical terms to address at the LOI stage are the basket (the minimum threshold of losses before indemnification is triggered, typically 0.5-1.0% of the purchase price) and the cap (the maximum indemnification liability, typically 10-20% of the purchase price for general reps and up to 100% for fundamental reps like ownership and authority). An indemnification holdback - a portion of the purchase price held in escrow for 12-18 months post-closing - provides practical enforcement of these provisions.

Employment and transition agreements

The LOI should address the post-closing employment arrangements for the seller and key employees. For the seller, define the expected transition period (typically 6-12 months), compensation during transition, and whether the arrangement is as an employee or consultant. For key employees whose retention is critical to the business, outline retention bonus structures or employment agreements that will be executed at closing. Getting these terms agreed upon early prevents last-minute holdups when the seller or key employees attempt to renegotiate their arrangements with closing use.

Negotiation strategies

• Anchor with a fair offer: Unlike venture capital, ETA deals involve personal relationships with owner-operators. Lowball offers damage trust. Start with a fair valuation based on comparable transactions and clear methodology.
• Prioritize exclusivity: Exclusivity is more valuable to you than a slightly lower price. If the seller is reluctant, offer a shorter initial period with extension options tied to milestones.
• Use structure to bridge price gaps: If the seller's price expectation exceeds your valuation, bridge the gap with seller notes, earn-outs, or a management consulting agreement during the transition period. These tools reduce your upfront cash outlay and align incentives.
• Keep the LOI simple: Resist the urge to over-negotiate the LOI. It is a framework, not a definitive agreement. Over-lawyering the LOI signals distrust and can kill deals. Save the detailed provisions for the purchase agreement.
• Protect your exit ramps: Ensure the due diligence contingency and financing contingency are clearly worded and at your sole discretion. These are your protection against overpaying or acquiring a problematic business.
• Address the seller's concerns proactively: Most SME owners care about their employees, their legacy, and certainty of close. Address these directly in the LOI, commit to employee retention, describe your operating philosophy, and demonstrate that your financing is credible.

EU-specific formats and considerations

France: Lettre d'intention

In France, the LOI (lettre d'intention) carries particular legal significance. French courts have interpreted overly detailed LOIs as creating binding obligations, even when labeled as non-binding. Keep the language conditional and avoid specific commitments. The LOI should reference “sous réserve de” (subject to) due diligence and financing. Employee information rights under the Hamon Law (for businesses with fewer than 250 employees) must be observed, employees have a right to be informed of a potential sale and may make a competing offer.

Germany: Absichtserklärung

German LOIs (Absichtserklärung or Letter of Intent) typically follow a structure similar to Anglo-Saxon practice. However, German law imposes a duty of good faith (Treu und Glauben) during negotiations, and breaking off talks without legitimate reason after a signed LOI can trigger liability for reliance damages (culpa in contrahendo). The share purchase agreement (SPA) for a German GmbH acquisition must be notarized by a German notary (Notar), which adds time and cost to the process.

Spain and other EU markets

In Spain, the carta de intenciones follows similar principles. Spanish law also recognizes pre-contractual liability, so be careful about creating expectations you may not fulfill. In the Netherlands and the Nordics, LOI practices closely follow Anglo-Saxon conventions, making them generally more familiar to international investors.

From LOI to closing

Signing the LOI is a milestone, not the finish line. The typical path from LOI to closing takes 3-6 months and involves confirmatory due diligence, negotiation of the definitive purchase agreement, securing acquisition financing, obtaining regulatory approvals, and coordinating the closing mechanics. Maintain momentum by setting clear deadlines, communicating frequently with the seller, and managing your professional advisors (lawyers, accountants, lenders) actively. Deals die in the gaps between milestones.

Key milestones from LOI to close

The post-LOI process typically follows a predictable sequence. In weeks one through four, you conduct intensive financial diligence - quality of earnings analysis, working capital analysis, and review of tax returns and financial statements. In weeks four through eight, operational and legal diligence proceeds in parallel: customer and vendor interviews, employee assessments, contract review, and environmental or regulatory compliance checks. Simultaneously, your attorney begins drafting the purchase agreement based on the LOI framework. By weeks eight through twelve, the purchase agreement should be in advanced negotiation, acquisition financing (SBA loan, bank debt, or equity commitment letters from investors) should be substantially committed, and remaining diligence items should be winding down. The final two to four weeks involve purchase agreement execution, funds flow coordination, and closing logistics. Missing any of these milestones by more than a week should trigger a candid conversation with the seller and a reassessment of the timeline.

Why deals fail between LOI and close

Industry data suggests that approximately 30% of signed LOIs do not result in a completed transaction. Understanding the most common failure modes helps you avoid them. The leading cause is diligence discoveries - material discrepancies between the seller's representations and the actual condition of the business, including overstated earnings, undisclosed liabilities, customer concentration risk, or pending litigation. The second most common cause is financing failure - inability to secure adequate debt or equity on acceptable terms, often triggered by diligence findings that make lenders uncomfortable. Seller's remorse is the third major cause: the emotional difficulty of selling a life's work causes some sellers to create obstacles, become unresponsive, or renegotiate terms late in the process. Finally, interpersonal breakdowns between buyer and seller - damaged trust from aggressive negotiation tactics, cultural mismatches, or communication failures - can kill otherwise viable deals. The best protection against all of these risks is a well-drafted LOI with clear contingencies, disciplined diligence, and consistent, empathetic communication with the seller throughout the process.

Multiple LOI strategies

Searchers sometimes face the question of whether to pursue multiple targets simultaneously and how to manage competing LOI processes. The right approach depends on where you are in your search timeline and how competitive the deal environment is.

Competitive vs. exclusive LOIs

In a brokered process, often sourced through business brokers where multiple buyers are bidding, you may submit a competitive LOI alongside other bidders. Competitive LOIs require sharper pricing (less room for a valuation range), stronger certainty-of-close language, and fewer contingencies to stand out. In a proprietary deal - one you sourced directly through outreach to the owner - you are typically the sole bidder, and the LOI can include more buyer-friendly terms like wider price ranges, longer exclusivity periods, and broader diligence contingencies. Proprietary deals are generally preferable because the relationship dynamic is more collaborative, but competitive processes can still produce excellent acquisitions if you bring differentiated value beyond price (such as industry expertise, a compelling transition plan, or strong cultural alignment with the seller's values).

Managing multiple targets simultaneously

Some searchers maintain parallel tracks with two or three targets before committing to an exclusive LOI with one. This approach increases the probability of closing a deal within your search timeline but also creates significant complexity. Each target requires separate diligence workstreams, legal engagement, and relationship management. The risk of reputational damage is real: if a seller discovers that you are simultaneously pursuing their competitor, trust evaporates. The recommended approach is to advance multiple opportunities through initial evaluation and management meetings, but sign an exclusive LOI with only one target at a time. If that deal falls through, you can quickly pivot to your next-best opportunity, which you have already vetted at a preliminary level. This disciplined approach balances pipeline management with the integrity that the search fund community demands. For more on building a healthy pipeline, see our guide on deal sourcing strategies.

Frequently Asked Questions

What should the purchase price section of an LOI include?

The purchase price section should state the proposed enterprise value and how you arrived at it (for example, a multiple of trailing twelve months adjusted EBITDA). Specify whether the price is fixed or subject to a working capital adjustment at closing. Many search fund LOIs express the price as a range to preserve negotiating flexibility while giving the seller a clear indication. Also clarify the form of consideration, cash at closing, seller notes, earn-outs, or a combination.

How long does it take to go from LOI to closing?

The typical path from a signed LOI to closing takes 3-6 months. The first four weeks focus on intensive financial diligence and a quality of earnings analysis. Weeks four through eight cover operational and legal diligence plus purchase agreement drafting. Weeks eight through twelve involve finalizing the purchase agreement, securing acquisition financing, and closing remaining diligence items. Industry data suggests approximately 30% of signed LOIs do not result in a completed transaction, most commonly due to diligence discoveries, financing failures, or seller’s remorse.

Can I submit LOIs to multiple sellers at the same time?

You can advance multiple opportunities through initial evaluation and management meetings simultaneously, but you should sign an exclusive LOI with only one target at a time. Signing multiple exclusive LOIs simultaneously is considered unethical in the search fund community and risks reputational damage. If your first deal falls through, you can quickly pivot to your next-best opportunity if you have maintained a warm pipeline.