What an LOI actually is
A short document stating what the buyer intends to pay, in what form, and on what timetable, subject to diligence. The commercial terms are expressions of intent and the buyer can walk away from all of them. Two or three clauses are genuinely binding: confidentiality, exclusivity, and sometimes who pays costs if it collapses. Those are the ones to read twice.
The clauses that decide the deal
| Clause | What it does | What to look for |
|---|---|---|
| Purchase price | The headline number, before any structure | Whether it is cash at close or a total including contingent money |
| Structure | Splits the price into cash, holdback and earn-out | The cash-at-close figure is the only one you are certain to receive |
| Exclusivity | Stops you talking to anyone else | Length. Thirty to forty-five days is normal; ninety at this size is not |
| Diligence scope | What they get to inspect and for how long | A defined list and an end date, not open-ended access |
| Conditions | What must be true at close | Anything vague enough to be a free option to renegotiate |
| Escrow / holdback | Money held back after close against warranty claims | How much, how long, and what releases it |
General guidance, not legal advice. At this size a lawyer reading the LOI costs a fraction of the exclusivity period you are about to give away.
Cash at close is the number that matters
A headline of $301,000 with half held in a two-year earn-out is not a $301,000 offer. Earn-outs at this size depend on a business you no longer control, run by someone whose priorities change the week after close. Price the cash, treat the rest as upside you might not see, and then ask whether the cash alone is a deal you would accept.
Before you sign
- 01Know your own number first. An offer can only be judged against a valuation you did before it arrived, otherwise the offer becomes the anchor and you negotiate down from their figure instead of up from yours.
- 02Shorten exclusivity if it is long, and tie it to milestones: diligence materials delivered, purchase agreement drafted. An open-ended lock-up with a slow buyer is how deals die quietly.
- 03Get the diligence list attached. A buyer who cannot say what they need to see has not decided to buy yet.
- 04Ask what is funding it. Cash on hand, a lender, or a raise that has not closed — each has a different chance of reaching completion, and you are about to stop talking to everyone else.
- 05Have your own risks written down before they find them. Disclosed risk is discounted far less than discovered risk, which is the single most reliable way to lose price between LOI and close.
What happens next, roughly
Diligence for two to six weeks: financial verification against your payment processor, code and infrastructure review, customer and churn analysis, and the contracts. Then a purchase agreement, which is where the warranties and the escrow get negotiated properly. Then close and transfer, usually with a handover period you should assume is longer than the buyer suggests.
The moment price gets re-traded is almost always in diligence, when something turns up that was not in the story: concentration nobody mentioned, churn measured a different way, revenue that includes a customer who has already given notice. The defence is having said it yourself, in writing, before they asked.