Khaled Azar 
Most sellers sign a letter of intent within 48 hours of receiving one. That is the single most expensive mistake in any exit.
Once you sign, your negotiating position collapses. The buyer has exclusivity. You have nothing to shop. Every term that follows, from working capital methodology to escrow percentage to earnout structure, gets negotiated from a weaker position than it had to be.
The LOI is the one moment in the deal where the buyer wants your signature more than you want to sell. That window is short. This is how I walk clients through the five terms that cost sellers the most money, ranked by impact.
The Exclusivity Period Is Your Most Valuable Card
I advised a founder who signed a 90-day exclusivity with no milestone requirements. The buyer had strong numbers, solid references, and a motivated deal team. On paper, nothing looked wrong.
By month two, diligence requests had slowed to a trickle. The buyer’s internal deal committee had rotated. Three requests for “updated financials” hit in the same week. The deal eventually closed, but at a renegotiated price. And the seller watched a comparable company in the same space close six weeks earlier at a multiple that would have meant an additional $1.4M in proceeds. The market moved while they waited.
That outcome is preventable. Cap exclusivity at 45 to 60 days. Require written milestones: a complete diligence request list by day 10, a draft purchase agreement by day 35, a final term sheet confirmation by day 50. If the buyer misses any checkpoint, exclusivity expires automatically.
Standard exclusivity runs 30 to 60 days. Buyers routinely ask for 90. Never accept 60 or more days without written milestone requirements tied to specific dates. No milestones, no signature.
A serious buyer has no reason to resist milestones. A buyer who does is showing you something about how they operate before you are locked in.
This is also where understanding what happens between LOI and close becomes critical. The post-signing timeline has its own pressure points. The exclusivity period you negotiate now determines how much buffer you have for all of them.
Working Capital Methodology: Define It Before You Sign, Not After
Most LOIs say the deal is “cash-free, debt-free with a normalized level of working capital delivered at closing.” That sounds standard. It is not a number. It is a trap.
“Normalized” becomes whatever the buyer says it means once they have exclusivity. Sellers who leave this undefined routinely see closing adjustments of $200,000 to $800,000 on a $5 to $10M deal. That is 4 to 16% of your purchase price renegotiated after you have already stopped running a competitive process.
According to Mintz (March 2025), sellers should push at LOI stage for a bespoke working capital calculation that specifically names what is included and excluded, and negotiate a working capital collar. A collar defines a band around the target within which no adjustment is made in either direction. It eliminates post-close disputes over rounding, timing differences, and seasonal cash variation.
The language to request at LOI stage: “Working capital target of $[X], calculated using [methodology], with a $[Y] collar. Seller to provide a sample calculation at signing.” That is a negotiable starting position. It is far stronger than “subject to negotiation in the definitive purchase agreement,” which translates to: the buyer’s counsel will draft this however they want.
For a detailed breakdown of how these adjustments play out at closing, see our guide to working capital targets and the closing adjustment.
Escrow and Indemnification: Know Your Number Before You Sign
The median general indemnification escrow is 10% of deal value without representations and warranties insurance and 0.5% with it. On a $6M deal, that is the difference between $600,000 locked up for 12 to 18 months and $30,000. (Fasken / SRS Acquiom M&A Deal Terms Study, March 2025)
The LOI should define the escrow percentage, the survival period, the deductible structure, and whether representations and warranties insurance is in play. Sellers who accept “standard indemnification terms to be negotiated in the purchase agreement” hand the buyer’s counsel a blank page.
Push for RWI. It moves your exposure from 10 to 15% of deal value tied up in escrow for 12 to 18 months down to roughly 0.5% in a seller indemnity escrow. Both sides benefit from the reduced friction that RWI creates, which is why it has become increasingly standard in lower middle market deals.
Also define the survival period for non-fundamental representations. The standard is 12 to 18 months. Push for the shorter end. Fundamental representations around title, taxes, and fraud survive longer by convention. Everything else should not.
Earnouts: Resist First, Then Protect
The starting position is no. Earnouts increase deal cost, create post-close friction, and almost always benefit the buyer. Any earnout that cannot be measured objectively creates litigation risk.
If you cannot negotiate an earnout out of the LOI entirely, the protective covenants matter more than the targets. Per Mintz (March 2025), sellers should require that the buyer cannot materially change product strategy, pricing structure, or sales approach during the earnout period without written consent. Without these covenants, the buyer can restructure operations post-close in ways that make your earnout mathematically unreachable.
Revenue-based earnouts are more favorable than EBITDA-based ones. The buyer controls your cost structure after close. They do not control your customers. Set the earnout metric on the variable they cannot touch.
Also push for a minimum floor: a guaranteed payment of 30 to 50% of the earnout maximum regardless of performance. If the buyer deprioritizes integration after close, you should receive something. A floor is a standard ask and a reasonable one.
No-Shop Scope and Break-Up Fee
The no-shop clause prohibits you from actively soliciting other offers. It should not prohibit you from taking inbound calls, disclosing you are in a process when asked, or responding to unsolicited interest from other parties. Define this scope in the LOI itself.
“No active solicitation of competing offers” is appropriate. “No discussions with any third party regarding a transaction” is not. That distinction matters when a second qualified buyer calls during week three of your exclusivity window.
Pair the no-shop clause with a break-up fee. If the buyer walks without cause after exclusivity is signed, you should receive a payment, typically 1 to 3% of deal value. This compensates for the legal costs, the time invested, and the market window you closed to honor the agreement. A buyer confident in their ability to close will not resist this.
This connects directly to the timing risk described in the real cost of waiting to sell. Signing a no-shop without a break-up fee transfers all timing risk from the buyer to you.
Once you enter exclusivity and diligence begins, see due diligence red flags from the seller’s side for what buyers are reading into what they find.
Frequently Asked Questions
Can you negotiate an LOI?
Yes. Everything in an LOI is negotiable before you sign. The buyer needs your signature to get exclusivity, which means your negotiating position is strongest in this window. Push hardest on exclusivity period length, working capital methodology, and escrow terms. These three terms affect more of your final proceeds than anything else in the document.
How long should an LOI exclusivity period be?
45 to 60 days is the right target for most lower middle market deals. Standard practice runs 30 to 60 days, but buyers routinely ask for 90 or more. Accept 60 days or less, and require written milestone checkpoints tied to specific dates. If the buyer misses them, exclusivity expires automatically. Never sign a 90-day exclusivity without milestones attached.
What are red flags in a letter of intent?
Four patterns signal problems: a working capital definition left entirely to the definitive purchase agreement; an escrow percentage above 15% without representations and warranties insurance; an exclusivity period over 60 days with no milestones; and a no-shop clause that prohibits any discussions with third parties, including responding to inbound interest. Any one of these should trigger a negotiation before you sign.
Is a letter of intent legally binding?
Most LOI terms are non-binding and serve as a starting point for the definitive purchase agreement. The binding provisions are typically the exclusivity period, the no-shop clause, the confidentiality agreement, and expense allocation. These carry real teeth. Everything else is an agreed framework subject to final negotiation in the purchase agreement.
Next Steps
Heading into LOI negotiations? A value assessment gives you the data to push back with confidence on every term that matters.