A letter of intent (LOI) can make a proposed business sale feel settled before the most consequential details have been tested. It normally sets out the proposed price, structure and path to a definitive agreement, but a headline price is not the same as cash received at closing. Owners should compare the whole offer, including contingent payments, closing adjustments and the obligations they accept during diligence.

What an LOI Does and Does Not Do

An LOI records the parties’ proposed transaction framework before they complete diligence and negotiate final documents. Economic terms are often expressed as nonbinding, while provisions such as confidentiality and exclusivity may be binding. The words of the actual document and applicable law matter, so transaction counsel should identify exactly which provisions are enforceable before anyone signs.

Signing an LOI is not the same as closing a sale. A buyer may still need to verify earnings, contracts, operations, financing and other conditions. Nor does a nonbinding price automatically preserve a seller’s ability to speak with other buyers: a no-shop clause can restrict that option while diligence proceeds.

Compare Offers With an Economics Bridge

Before comparing two proposed purchase prices, ask the buyer to specify the amount expected at closing and each item that could change it. This is a working framework for reviewing an LOI, not a valuation formula or a prediction of proceeds:

1. Headline value: Is the offer stated as enterprise value, equity value or an asset price? What is included?
2. Cash at closing: Which amounts are deferred, held in escrow or subject to a holdback?
3. Contingent value: What must happen for an earnout or other later payment to be made, and who controls the relevant decisions?
4. Closing adjustments: How will debt, cash, transaction expenses and the working capital peg affect the final amount?
5. Owner obligations: Are employment, transition, rollover investment or restrictive-covenant terms part of the proposed package?

Two offers with the same headline figure can therefore present different timing, risk and obligations. Ask advisers to build a side-by-side proceeds bridge using the actual terms. Do not present uncertain payments as if they were cash already committed.

Test the Assumptions Behind the Price

A price may rest on assumptions that are easy to miss in a short letter. Ask what earnings measure supports it, which adjustments the buyer has accepted, and whether the offer assumes a particular level of working capital or a debt-free, cash-free delivery. If those points remain open, identify the evidence needed to resolve them rather than assuming the price cannot move.

The quality of earnings preparation that precedes a sale can help make the earnings discussion more traceable. It does not eliminate buyer diligence. Contract assignability, major-customer exposure and management continuity can also change how a buyer views risk. Owners can prepare supporting documents without accepting an unsourced claim that any single issue must reduce value by a fixed percentage.

Make Exclusivity Earn Its Place

Exclusivity can give a buyer a clear window to spend time and money on diligence. For a seller, it may also suspend conversations with alternative buyers. Before granting it, examine its start and end dates, any extension rights, the buyer’s financing plan and the milestones for diligence and draft agreements. A long window without a credible work plan is a different proposition from a defined period tied to progress.

Have counsel review the precise scope of the no-shop and confidentiality language, including who is covered and what happens if the transaction ends. There is no universal exclusivity period appropriate for every company or buyer. Complexity, financing and the readiness of the seller’s records should shape the timetable.

A Pre-Signature Review Sequence

A practical sequence is to compare the full economics first, list unresolved assumptions second, test the buyer’s ability to execute third, and review binding language with counsel fourth. Only then decide whether the exclusivity tradeoff is acceptable. This order helps avoid spending the entire conversation on a headline number while material terms remain undefined.

If an LOI is already in hand, mark each term as agreed, assumed or open. Assign an owner and a document for each open item. Then align the proposed diligence calendar with the broader business-sale timeline. The goal is not to make every clause final at the LOI stage; it is to know which uncertainties you are accepting before you lose negotiating flexibility.

The Practical Takeaway

A useful LOI makes the proposed transaction comparable, testable and executable. Read it as a package of economics, assumptions, process commitments and potentially binding restrictions. Ask qualified legal, tax and accounting advisers to assess the actual document and circumstances before signing.