If you are preparing to sell your company, the letter of intent is one of the most important documents you will ever sign.
It can accelerate your deal.
Or it can quietly reduce your leverage.
As senior advisors at Elkridge Advisors, we have seen sellers celebrate a strong LOI only to realize later that critical terms were working against them.
Let’s walk through what a letter of intent really is, the true LOI meaning, and how to structure it so you protect valuation and maximize proceeds.
If you are considering a sale in the next 12 to 36 months, this is required reading.
What Is a Letter of Intent
Let’s start with the basics.
If you are asking, what is a letter of intent, here is the simple answer.
A letter of intent, often called an LOI, is a written proposal from a buyer outlining the key terms under which they want to acquire your business.
It is not the final purchase agreement!
But it sets the tone and direction for everything that follows.
Think of it as the blueprint for the deal.
The LOI typically outlines:
- Purchase price
- Deal structure
- Cash at close
- Earnouts
- Working capital expectations
- Exclusivity period
- Timeline to close
Most sellers focus almost entirely on the headline number.
But the real leverage lives in the details.
The LOI meaning goes far beyond price. It determines risk allocation, negotiating power, and how much control you retain during diligence.
Before you sign anything, let’s review it together.
A well negotiated letter of intent can add millions to your outcome.
Why the Letter of Intent Is More Than Just a Price
A buyer may offer $10M.
But how much do you actually receive at closing?
How much is contingent?
How much is subject to working capital adjustments?
How long are you locked into exclusivity?
A strong LOI balances valuation, certainty, speed, and risk.
For example, $8M all cash at close may be stronger than $10M with $3M in earnouts and aggressive adjustments.
But let’s go deeper.
The letter of intent determines:
- How the purchase price is calculated
- How it is paid
- When it is paid
- What can reduce it
- What protections the buyer builds in
Two LOIs with the same headline number can produce radically different outcomes.
One might include:
• A 90 day exclusivity period
• A broad due diligence scope
• A subjective earnout based on future performance
• A large escrow held for 24 months
• A working capital target set above historical averages
Another might include:
• A shorter exclusivity window
• Clear and objective diligence standards
• Minimal escrow
• No earnout
• A working capital peg aligned with trailing twelve month averages
Both say $10M.
Only one protects your downside.
This is why sophisticated buyers spend enormous effort drafting the LOI carefully. They understand that once exclusivity begins, renegotiation leverage shifts in their favor.
The LOI also frames the narrative for the attorneys. If ambiguity exists in the letter of intent, it almost always benefits the buyer during the definitive agreement stage.
And here is something most sellers miss.
The LOI influences financing dynamics.
If the buyer is using SBA financing, private equity capital, or lender leverage, the structure in the LOI must align with funding realities. If not, retrading becomes highly likely after diligence.
In other words, the LOI is not just a price proposal.
It is a risk allocation document.
It is a control document.
It is a leverage document.
If you want to evaluate whether an LOI truly reflects market value and protects your proceeds, let’s run a full structural analysis together.
Binding Versus Non Binding: What Sellers Get Wrong
Most LOIs are described as non-binding.
But that does not mean it is harmless.
Typically, the economic terms are non-binding, while exclusivity and confidentiality are binding.
This means you may be locked into negotiating with one buyer for 60 to 120 days.
During that period, you cannot solicit other offers.
This is where many sellers lose leverage.
A poorly structured exclusivity period can shift power entirely to the buyer. They can retrade the price after diligence, knowing you paused other conversations.
But the nuance goes even deeper.
Even when the purchase price is technically non binding, the psychology of the process becomes binding.
Once you sign an LOI:
- You inform management selectively.
- You emotionally commit to the transaction.
- You begin envisioning life after the exit.
- You stop speaking to other buyers.
Momentum builds around one outcome.
Buyers understand this dynamic extremely well.
That is why retrading often happens late in diligence. A buyer may cite quality of earnings findings, customer concentration risks, or working capital variances to justify a price reduction of $500K to $2M. Technically, they are within their rights. The LOI was non binding.
But practically, your alternatives are limited.
Restarting the process costs time, credibility, and energy.
Another area sellers misunderstand is enforceability risk.
Some LOIs include provisions that blur the line between non binding and binding. Phrases like “subject to definitive agreement” do not automatically eliminate legal exposure if conduct implies reliance. Courts have occasionally enforced portions of LOIs where intent appeared clear and reliance was demonstrated.
This is rare, but not theoretical.
Clarity matters.
Additionally, exclusivity is not just about time.
It is about scope.
Does it prevent you from speaking to other strategic buyers?
Does it block outreach to private equity firms?
Does it prohibit passive conversations?
Does it include automatic extensions if diligence is ongoing?
We have seen exclusivity clauses quietly extend beyond 120 days because diligence was “in progress.” That is leverage erosion in slow motion.
The strongest sellers negotiate:
- Short, clearly defined exclusivity periods
- Milestone based extensions only
- Defined diligence timelines
- Clear termination rights
Non binding does not mean neutral.
It simply means the battle shifts from legal obligation to strategic positioning.
Before signing any letter of intent, we pressure test every binding clause and model downside scenarios if retrading occurs.
The Psychology Behind an LOI
The moment a letter of intent arrives, emotions run high.
You feel validated.
You feel close to the finish line.
But this is actually the midpoint of the transaction.
Sophisticated buyers know that once exclusivity begins, sellers are psychologically invested.
That is when renegotiations often occur.
The strongest sellers treat the LOI not as a finish line, but as a leverage inflection point.
They ensure:
- Competitive tension is maintained
- Diligence timelines are tight
- Price adjustments are clearly defined
- Ambiguity is minimized
This discipline often determines whether you exit at 6x EBITDA or 8x EBITDA.
Common Seller Mistakes With a Letter of Intent
Here are the patterns we see repeatedly:
- Accepting the highest headline price without analyzing structure
- Granting long exclusivity without penalties
- Ignoring working capital mechanics
- Overlooking escrow exposure
- Failing to model tax impact
These are not small issues.
They are often the difference between walking away with $5M and $7M.
The letter of intent sets the framework that attorneys will later expand upon. If it is weak, the final agreement rarely improves.
But the surface level mistakes are only part of the story.
Let’s go deeper into where value quietly erodes.
Confusing Speed With Certainty
Some sellers choose the buyer who promises the fastest close.
Speed feels attractive.
But fast does not always mean secure.
If the LOI lacks defined diligence timelines, financing clarity, or deposit structures, “fast” can quickly turn into 120 days of open ended renegotiation.
Certainty is more valuable than speed.
A disciplined LOI balances both.
Failing to Stress Test the Buyer
Not all buyers are equal.
Is the buyer well capitalized?
Have they completed transactions of this size before?
Do they have committed funds, or are they raising capital after signing the LOI?
Many sellers scrutinize their own numbers but fail to diligence the buyer.
That imbalance increases retrade risk.
Ignoring Post Closing Risk
Sellers often focus entirely on cash at close.
But what about:
- Indemnification caps
- Personal guarantees
- Non compete restrictions
- Clawback provisions
- Earnout governance
If these are loosely defined in the LOI, they tend to expand in the purchase agreement.
That can expose you to future financial or operational risk long after closing.
Underestimating Tax Structure
An LOI that does not clarify asset sale versus stock sale structure can create significant tax surprises.
For example, a $10M asset sale may produce materially different net proceeds than a $10M stock sale depending on basis, depreciation recapture, and state tax exposure.
If structure is not addressed early, it becomes harder to renegotiate later.
Net proceeds matter more than headline valuation.
Signing Before Competitive Tension Is Fully Developed
One of the most costly mistakes is signing the first reasonable LOI without testing broader market interest.
Even one additional credible bidder can:
- Improve price
- Shorten exclusivity
- Reduce escrow
- Eliminate earnouts
Competition disciplines buyers.
Without it, leverage shifts quickly.
Overconfidence in “We’ll Fix It in the Purchase Agreement”
Many founders assume that if something is vague in the letter of intent, their attorney can clean it up later.
In practice, attorneys negotiate within the framework already established.
If the LOI implies aggressive working capital adjustments or broad indemnification exposure, reversing those positions later is difficult.
The LOI sets expectations.
Expectations shape outcomes.
The most expensive mistakes in a transaction rarely come from dramatic miscalculations. They come from small structural concessions that compound across price, risk, and timing.
Before signing any letter of intent, we conduct a full structural and downside analysis so you understand exactly what you are agreeing to, not just what you hope the deal becomes.
How We Position Sellers Before the LOI Stage
The best LOIs are engineered before they are written.
We prepare:
- Clean financials
- Normalized EBITDA
- Clear working capital benchmarks
- Defined growth narratives
- Competitive buyer outreach
When buyers compete, terms improve.
When only one buyer is at the table, leverage declines.
Our objective is simple.
Create multiple attractive LOIs so you choose the best structure, not just the best headline number.
If you are planning to sell in the next 12 to 36 months, let’s start positioning your company now.
Final Thoughts
The letter of intent is not a formality.
It is not merely a summary of terms. It is the foundation of your exit. If you are asking about LOI meaning or wondering what is a letter of intent in practical terms, the answer is straightforward.
It is your first real negotiation. When structured correctly, the deal tends to progress efficiently and predictably.
When structured poorly, you may spend months trying to recover lost leverage.
Experienced sellers understand that the LOI is not just about completing a transaction.
It is about preserving optionality.
A well structured LOI protects your ability to walk away if diligence uncovers unexpected issues.
It safeguards your negotiating leverage and establishes clarity around economics, risk allocation, and timing before legal costs begin to escalate.
A weak LOI produces the opposite effect.
It can lock you into exclusivity without meaningful protection, introduce ambiguity around working capital or indemnification, increase the likelihood of retrading, and gradually shift control to the buyer in ways that are not immediately obvious.
The difference between strength and weakness in an LOI is rarely visible on the first page.
It is embedded in the structure, and structure ultimately determines outcomes.
At Elkridge Advisors, we do not treat the LOI stage as routine paperwork.
We view it as a strategic inflection point where enterprise value is converted into personal wealth.
Before you sign, we model best case proceeds alongside downside scenarios, evaluate tax implications, analyze liquidity timing, and assess risk exposure.
We pressure test assumptions, examine buyer credibility, and where appropriate, create competitive tension to protect your position.
Once exclusivity begins, your leverage window narrows, which is why preparation must happen before that moment.
If your objective is to exit for $8M, $15M, or $40M and feel confident that the number reflects true realized value, the letter of intent deserves disciplined strategy.
Your company may represent decades of effort, and the LOI is where that effort translates into financial reality.
Let’s ensure it is handled with precision, strength, and clarity.
