The LOI Isn't a Commitment - It's an Opening Bid

The champagne moment arrives. After months of preparation, marketing, and meetings, a buyer slides a letter of intent across the table with attractive terms and a handshake. Most sellers exhale, treating the LOI as the finish line. This celebration is often premature: retrading is common enough that assuming terms are final creates real vulnerability. That signed LOI isn’t the conclusion of negotiation. It’s frequently the starting gun for the real one, and the terms on that paper have a troubling tendency to erode before closing.

Executive Summary

A letter of intent represents one of the most misunderstood documents in M&A transactions. Sellers routinely treat the LOI as a binding commitment, celebrating terms that may never survive the due diligence process. This fundamental misunderstanding of LOI mechanics leaves sellers vulnerable to retrading: the practice of buyers renegotiating terms after gaining exclusivity and conducting diligence.

The reality is sobering. Retrading is common enough that sellers who assume their LOI terms are final expose themselves to significant risk. Understanding why this happens, which LOI terms actually bind the parties, and how to negotiate provisions that resist erosion can mean the difference between closing at your expected valuation and accepting substantially diminished terms under pressure.

This article examines the mechanics of letters of intent, distinguishes binding from non-binding provisions, analyzes common retrading patterns and the justifications buyers use, and provides frameworks for negotiating LOI terms that better withstand the rigors of due diligence. This guidance is most applicable to lower middle-market transactions in the $5-25 million range, though the principles extend to larger deals with some variation in dynamics. We assume US acquisitions under common law frameworks. This advice applies in reasonably competitive market conditions: in strong seller’s markets with abundant capital, buyers may accept more restrictive LOI terms, while in buyer’s markets, seller leverage for LOI improvements may be limited. Sellers who understand that LOI signing begins rather than ends negotiation enter the process with realistic expectations and stronger positioning.

Introduction

We’ve sat across the table from hundreds of business owners at the moment they receive their first serious letter of intent. The reaction is almost universal: relief, excitement, and an immediate mental shift from “selling” to “sold.” That psychological transition happens too early and costs sellers real money.

The letter of intent occupies a peculiar position in M&A transactions. It’s formal enough to feel binding, detailed enough to seem final, yet structured specifically to give buyers maximum flexibility while locking sellers into exclusivity. This asymmetry isn’t accidental. The LOI has evolved over decades of dealmaking into a document that serves buyer interests far more than seller interests unless sellers understand exactly what they’re signing.

Consider the typical seller’s journey. They’ve spent months preparing the business for sale, engaged advisors, created marketing materials, fielded inquiries, conducted management presentations, and negotiated with multiple interested parties. The LOI represents validation of all that effort. The natural human response is to view it as the culmination of the process rather than a transition to a new phase.

The structural dynamics following LOI signing are tied to increased retrading risk. Once a seller signs an LOI and enters exclusivity, several things happen at the same time: other interested buyers move on, the seller becomes emotionally committed to this particular transaction, time and money flow into due diligence support, and each passing week increases the seller’s switching costs. Whether or not buyers consciously exploit these dynamics, the structural incentives enable renegotiation. Some buyers may recognize and act on these dynamics strategically; others may simply find retrading justified by legitimately discovered issues. Other factors such as deal quality and buyer type also significantly influence retrading likelihood.

Understanding this reality doesn’t mean approaching every buyer with suspicion. Many buyers negotiate in good faith and close at or near LOI terms, particularly for clean businesses with professional buyers in strong market conditions. But sellers who understand LOI mechanics, anticipate retrading patterns, and negotiate appropriate protections enter the process with eyes open and leverage preserved. These strategies reduce but don’t eliminate retrading risk: some adjustment between LOI and closing remains normal in most transactions.

The Anatomy of a Letter of Intent

The letter of intent is deliberately constructed as a hybrid document: part binding contract, part non-binding expression of intent. Understanding which provisions fall into each category is essential for negotiating effectively.

Non-Binding Provisions

The core economic terms of most LOIs are explicitly non-binding. This includes purchase price, payment structure, representations and warranties, indemnification terms, and most other provisions that define the actual deal. Buyers insist on this non-binding status because they want flexibility to adjust terms based on diligence findings.

Sellers often ask: if these terms aren’t binding, what’s the point of negotiating them? The answer is both practical and psychological. Practically, the LOI establishes a baseline from which all future negotiation proceeds. Buyers who want to deviate from LOI terms must justify the change, creating at least some friction against aggressive retrading. Psychologically, both parties invest in the relationship and develop expectations based on LOI terms, creating informal pressure to honor commitments even without legal obligation.

Binding Provisions

While economic terms remain non-binding, several LOI provisions typically carry full legal effect. These binding provisions deserve careful attention because they create real obligations with real consequences.

Exclusivity clauses prevent sellers from negotiating with other buyers during a specified period. In competitive middle-market processes, buyers often request 90-120 day exclusivity periods, though sellers with multiple interested bidders may successfully negotiate 45-60 days. This provision benefits buyers enormously: they gain a protected window to conduct diligence while the seller’s alternatives evaporate.

Confidentiality obligations protect information shared during diligence. These provisions typically survive even if the transaction fails, preventing buyers from using sensitive competitive information obtained during the process.

Expense allocation determines who pays for transaction costs, particularly if the deal fails. Some LOIs include break-up fees or expense reimbursement provisions that can significantly impact the economics of a failed transaction.

Governing law and dispute resolution provisions establish the legal framework for any conflicts arising from the LOI itself.

The Exclusivity Trap

Exclusivity deserves special attention because it represents a significant shift in leverage during the M&A process. Before signing an LOI with exclusivity, sellers typically have multiple interested parties, competitive tension, and the ability to walk away without significant cost. After signing, they have one buyer, reduced alternatives, and mounting investment in the transaction.

Exclusivity contributes to leverage erosion through a specific mechanism: it prevents engagement with alternatives, creating sunk cost psychology in the seller. The passage of time during exclusivity increases seller switching costs independently. Together, these dynamics create vulnerability to retrading.

Sophisticated sellers approach exclusivity as a valuable concession that requires adequate compensation. This might include a higher purchase price, better terms, or shorter exclusivity periods. The key insight is that exclusivity has real value to buyers: they should pay for it.

We advise clients to negotiate exclusivity periods of 45-60 days rather than the 90-120 days buyers often request, particularly when multiple buyers are competing. Shorter periods create urgency for buyers to complete diligence efficiently. Include milestone requirements (specific diligence progress that must occur for exclusivity to continue) and negotiate automatic expiration rather than requiring formal termination notice.

Exclusivity length is one of several controls on retrading, not the primary defense. More important are thorough self-diligence before LOI to prevent major discoveries, detailed LOI provisions that reduce retrading justification, and careful buyer selection. Don’t let exclusivity length become the sticking point that loses the deal if other provisions can be strengthened.

The Retrading Reality

Retrading refers to the buyer practice of renegotiating LOI terms during or after due diligence. While sometimes legitimate, retrading often follows predictable patterns that sellers can anticipate and resist.

Common Retrading Patterns

Retrading occurs for three distinct reasons, and understanding these distinctions matters for crafting appropriate defenses.

Legitimate diligence discoveries represent the most defensible form of retrading. Buyers find genuine issues during diligence that weren’t disclosed or that differ materially from seller representations: an undisclosed lawsuit, overstated revenue, or hidden liability. When legitimate, buyers have reasonable grounds for adjustment. Against this type of retrading, the primary defense is thorough self-diligence and complete disclosure before the LOI. Distinguishing between legitimate diligence discoveries and opportunistic renegotiation matters: the former may benefit both parties by ensuring accurate pricing.

Market condition changes occur when genuine shifts in market conditions, financing availability, or economic outlook affect deal viability. Strategic buyers may face legitimate operational questions; financial buyers (PE firms) may face genuine financing constraints when credit markets tighten. Against this type of retrading, narrow material adverse change definitions provide protection.

Opportunistic renegotiation represents the most problematic pattern, where buyers use the asymmetric position created after LOI signing to extract better terms they could have requested initially. Late-stage pressure emerges near closing when buyers know sellers have invested months of effort, incurred significant costs, and made emotional commitments. Against this type of retrading, exclusivity limitations, reverse break-up fees, and credible walk-away capability provide protection.

The critical insight is that asymmetric position enables opportunistic retrading but does not cause legitimate diligence discoveries or genuine market changes. Sellers need defenses tailored to all three types.

Why Retrading Succeeds

Retrading succeeds because of the asymmetric position created by the LOI process itself. Sellers who have been in exclusivity for 60-90 days face unappealing alternatives:

• Other buyers who expressed interest have moved on to different opportunities
• Market conditions may have shifted during the exclusivity period
• Significant time and money have been invested in supporting this buyer’s diligence
• Employees, advisors, and family members expect the transaction to close
• The emotional energy of restarting the process feels overwhelming

These dynamics create conditions where many sellers will accept meaningful term erosion rather than walk away and restart the process. This doesn’t make all buyers bad actors (many negotiate fairly) but it does mean sellers must structure LOIs to reduce retrading incentives and preserve their ability to walk away.

Retrading Patterns by Buyer Type

Retrading patterns vary significantly by buyer type. Strategic buyers (competitors or industry players) often use diligence discovery justifications because they understand the business model and can credibly claim operational adjustments are necessary. Financial buyers (PE firms, funds) are more likely to use financing gap justifications because their equity return requirements are fixed and market conditions genuinely affect financing availability. Family office and individual buyers may retrade based on personal risk tolerance changes rather than systematic patterns.

These patterns also vary by industry. They are most pronounced in service businesses where earnings quality questions arise frequently. Manufacturing businesses with hard assets may face different retrading patterns focused on working capital and equipment valuation. Technology companies often see retrading centered on intellectual property ownership and customer contract transferability.

Understanding your buyer type and industry dynamics helps anticipate which retrading patterns you’re most likely to face and which defenses to prioritize.

Defending Against Retrading

The best defense against retrading begins before the LOI is signed. Sellers should conduct rigorous self-diligence before going to market, identifying and addressing potential issues before buyers discover them. In our experience, this typically requires 2-4 months for well-organized businesses with standard structures, though complex businesses or those requiring financial statement cleanup, compliance resolution, or customer diversification may need 6-8 months. Complete disclosure in the marketing process reduces the ammunition available for diligence-based retrading.

Within the LOI itself, sellers can include provisions that discourage retrading:

Material adverse change definitions should be narrow and specific, preventing buyers from claiming routine business fluctuations justify term changes. Specify exactly what constitutes a material adverse change and exclude ordinary course variations.

Diligence scope limitations can restrict the subjects and time periods buyers may investigate, reducing opportunities for issue discovery in areas already disclosed.

Walk-away provisions that clearly state the seller will terminate if terms change materially create credible threat value, but only if the seller can actually walk away.

Reverse break-up fees require buyers to compensate sellers if the buyer terminates without cause or attempts to retrade beyond specified parameters. These provisions may discourage aggressive retrading, though enforcing them is costly and often impractical if the buyer is financially stressed. Reserve reverse break-up fees for situations where seller leverage justifies them and where buyer financial capacity makes enforcement realistic.

Including aggressive retrading defenses raises the cost of retrading to the buyer. Aggressive defensive provisions may backfire by reducing initial buyer interest, creating an adversarial tone that affects the relationship, or proving unenforceable when tested. Reserve aggressive provisions for situations where seller leverage justifies them. Prioritize defenses that don’t deter buyer participation: detailed working capital methodology improves clarity without raising buyer cost; narrow MAC definitions restrict buyer retrading rights without deterring buyers from bidding.

Negotiating LOI Terms That Survive

Not all LOI terms are equally vulnerable to erosion. Understanding which provisions typically survive intact and which face pressure helps sellers prioritize their negotiating efforts.

Terms That Typically Hold

Cash at closing amounts receive the most protection because sellers prioritize liquidity and buyers understand this. Attempts to shift more consideration to earnouts or seller notes face strong resistance.

Base purchase price for businesses with clean diligence often survives intact, particularly for companies with documented financial performance, clean compliance records, and stable customer relationships. Buyers who significantly retrade on headline price may face relationship damage that affects transaction completion.

Employment and transition terms for the seller often survive because both parties benefit from smooth transitions and motivated sellers.

Terms That Face Pressure

Earnout structures attract significant renegotiation because they’re complex, subjective, and heavily dependent on post-closing cooperation. Buyers often push for more earnout consideration, longer earnout periods, or metrics that give them greater control over earnout achievement.

Working capital adjustments represent a common source of closing-table disputes. In middle-market deals, working capital disputes typically range from $50,000 to $500,000, representing roughly 2-8% of purchase price. Material enough to warrant serious attention to methodology. The complexity of working capital calculations creates opportunities for interpretation differences. Sellers who leave working capital methodology vague in the LOI frequently face unfavorable interpretations at closing.

Representations and warranties face substantial expansion during the definitive agreement negotiation. Sellers should expect buyers to request broader representations, longer survival periods, and larger indemnification baskets than contemplated in the LOI.

Escrow and holdback provisions typically expand from LOI to closing. Buyers frequently increase escrow amounts, extend holdback periods, and broaden the claims eligible for escrow recovery.

Strategic LOI Negotiation

Given these patterns, sellers should approach LOI negotiation strategically, fighting hardest for terms that will actually hold while trading terms that will inevitably face pressure.

Prioritize cash at closing. The most important number isn’t the headline purchase price: it’s the cash you receive at closing. This number faces the least pressure and represents certain value rather than contingent payments.

Evaluate earnout risk by structure, not just size. Earnout risk depends more on metric structure than percentage of deal value. Earnouts tied to buyer-controllable metrics (like cost reduction or integration synergies) are inherently risky regardless of percentage: the buyer controls whether you achieve the target. Earnouts tied to external metrics (like revenue growth) with strong payment language and third-party verification are less risky. Before accepting any earnout above 10% of deal value (a common threshold for service businesses, though manufacturing firms may reasonably accept higher percentages given more predictable operations), evaluate: Who controls the metric? What language guarantees payment? What happens if the buyer changes strategy post-closing? A well-structured 30% earnout may be safer than a poorly-structured 15% earnout.

Negotiate detailed working capital provisions. Rather than leaving working capital calculations to the definitive agreement, include specific methodology in the LOI:

• Specific formula for target working capital: Current assets minus current liabilities, excluding specified items like debt and transaction costs
• Example calculation: “If closing date balance sheet shows $500K current assets and $300K current liabilities, target working capital equals $200K”
• Treatment of disputed items: whether customer prepayments count as liabilities, how to handle accrued expenses, treatment of intercompany receivables
• Dispute resolution: if closing working capital differs from target by more than a specified threshold, trigger a specific resolution process

Without these specifics, general methodology language will still lead to disagreement at closing.

Specify representation and warranty parameters. Include materiality thresholds, survival periods, and cap amounts in the LOI. Buyers who accept these terms in the LOI face higher friction costs when attempting expansion.

Alternative Strategies Beyond LOI Negotiation

While this article focuses primarily on LOI defensive provisions, sellers concerned about retrading risk have alternative approaches worth considering:

Auction processes with multiple final bids maintain competitive tension longer and may reduce retrading because buyers know alternatives existed recently. Auction dynamics aren’t appropriate for every transaction and may deter some buyer types.

Staged sale processes allow sellers to test buyer behavior before full commitment. Smaller initial transactions or partnership arrangements can demonstrate buyer reliability before proceeding to full acquisition.

Buyer track record evaluation provides valuable information. Some buyers have reputations for closing at LOI terms; others are known for aggressive retrading. Your advisors should be able to provide intelligence on specific buyer behavior patterns.

Seller financing with protection can reduce retrading incentives. When sellers hold notes, buyers face consequences for post-closing misbehavior, potentially aligning incentives better than all-cash structures in some situations.

Managing the Post-LOI Process

How sellers conduct themselves after signing the LOI significantly affects retrading risk. Proactive management of the diligence process preserves pressure and discourages opportunistic renegotiation.

Maintain Deal Momentum

Delayed diligence creates opportunities for retrading. Buyers who encounter obstacles or slow responses may use the resulting timeline pressure to justify term changes. Sellers should have diligence materials organized and ready before signing the LOI. Respond to information requests promptly where feasible, but prioritize accuracy over speed. If a thorough response requires more time, communicate the timeline immediately rather than providing incomplete information. Proactively identify and address potential issues before buyers discover them.

Preserve Optionality Appropriately

Sellers should ensure their exclusivity language permits maintaining general market awareness through advisors. Sellers must not violate the exclusivity clause by engaging directly with other buyers. Most exclusivity provisions prohibit not just negotiation but even “discussions” about potential transactions with other buyers. Violating exclusivity (if discovered) creates breach liability and destroys trust with the current buyer.

The appropriate approach: keep advisors informed about general market conditions and ensure that if the current deal fails, restarting a process is feasible. Do not maintain covert relationships with alternative buyers that would violate the LOI. If your exclusivity language is aggressive, negotiate narrower scope that preserves your ability to maintain general advisor relationships.

Document Everything

Keep careful records of all buyer communications, representations, and commitments. When buyers attempt retrading, documented statements about their intentions, valuation rationale, and deal certainty provide pressure in pushing back. Buyers who made strong assurances face greater pressure to honor their commitments.

Know Your Walk-Away Point and Its Realistic Limits

Before signing the LOI, establish initial parameters for acceptable outcomes. What’s the minimum price you’ll accept? What deal structure changes would cause you to terminate?

Recognize that 60-90 days of exclusivity will shift your psychology, and predetermined parameters may erode. Schedule a reassessment 30-45 days into exclusivity with your advisors and, if applicable, spouse or business partner to confirm or adjust your walk-away point before it’s too late. Written documentation of this reassessment creates accountability against emotional drift.

Your walk-away credibility depends on your actual financial situation and timeline. Most sellers pursuing exits have timeline pressures (age, health, capital needs, or burnout) that sophisticated buyers recognize. If you need the sale, your walk-away threat is not credible, and experienced buyers will sense this. Walk-away pressure is most powerful when you’re financially comfortable continuing to operate, when your timeline is genuinely flexible, or when alternative buyers remain interested. This situation applies to fewer sellers than initially appears: be honest with yourself about which category you occupy.

Consider the “Do Nothing” Alternative

If retrading becomes aggressive, evaluate whether selling remains better than continuing to operate the business. This requires specific calculation:

Continuing operations value: Project 5-year profits under continued ownership, discount to present value using an appropriate rate (typically 15-25% for small business risk), and consider the multiple a future buyer might pay in improved conditions.

Sale proceeds value: Calculate net proceeds after transaction costs (typically 5-10% of deal value), taxes (potentially 20-40% depending on structure and jurisdiction), and any holdbacks or escrows.

Personal factors: Assess management burden, health considerations, age relative to planned retirement, and capital needs against liquidity provided by sale.

For profitable, growing businesses with owner-friendly economics, walking away and continuing operations may genuinely be superior to accepting materially worse sale terms. Quantifying this alternative (your BATNA: Best Alternative to Negotiated Agreement) makes your walk-away threat credible when it’s genuine. Some retrading disputes result in failed transactions, outcomes that may be preferable to accepting severely compromised terms.

Actionable Takeaways

Conduct thorough self-diligence before marketing. Identify high-priority issues (financial statement integrity, compliance matters, customer concentration) and either resolve them or disclose them upfront. For well-organized businesses, this typically requires 2-4 months; complex businesses may need 6-8 months. Retrading based on diligence discoveries requires ammunition: don’t provide it.

Negotiate reasonable exclusivity with milestone requirements. Push for 60 days where competitive dynamics support it; accept 90 days if necessary to secure the deal. Include specific diligence milestones that must occur for exclusivity to continue. But don’t make exclusivity the hill you die on: other LOI provisions often matter more.

Prioritize cash at closing over headline price. Evaluate earnout proposals based on structure, not just percentage. An all-cash deal at a lower headline price often delivers more certain value than a higher-priced deal with significant earnout exposure to buyer-controlled metrics.

Include detailed working capital methodology in the LOI. Given that working capital disputes typically range from $50,000 to $500,000 in middle-market deals, specify the formula, include example calculations, define treatment of disputed items, and establish dispute resolution procedures upfront. Vague language leads to closing-table disputes that typically disadvantage sellers.

Build appropriate retrading friction into the LOI. Narrow MAC definitions and specific termination conditions create costs for buyers who attempt opportunistic renegotiation. Reserve aggressive provisions like reverse break-up fees for situations where your pressure supports them and where buyer financial capacity makes enforcement realistic.

Assess your walk-away credibility honestly. Your ability to walk away depends on your financial situation, timeline, and alternatives, not just your determination. Most sellers have timeline pressures that limit true walk-away ability. If you genuinely can walk away, preserve that capability carefully. If you cannot, adjust your negotiating strategy accordingly rather than bluffing.

Manage diligence proactively. Organized, responsive, transparent sellers reduce the timeline pressure and information asymmetries that enable retrading. Anticipate requests and prepare materials before they’re needed.

Conclusion

The letter of intent occupies a peculiar position in M&A transactions: formal enough to feel binding yet structured specifically to remain flexible. Sellers who understand this reality approach the LOI as the beginning of serious negotiation rather than its conclusion.

This understanding doesn’t require cynicism about buyer intentions. Strategic buyers often have legitimate operational questions; financial buyers often face genuine financing constraints. Much retrading reflects legitimate diligence discoveries or genuine market changes rather than opportunistic behavior. The issue is protecting yourself against the opportunistic subset while maintaining productive relationships with good-faith buyers.

We encourage every seller to approach the LOI with clear eyes and strategic intent. Fight for terms that will actually hold (cash at closing, well-structured earnout metrics, detailed working capital methodology). Accept that some provisions will face pressure and allocate negotiating capital accordingly. Most importantly, understand your actual walk-away capability and preserve it where genuine. Success also depends on buyer type, market conditions, and pressure: factors that vary significantly across transactions.

The LOI isn’t a commitment: it’s an opening bid. Treat it accordingly, and you’ll enter the definitive agreement negotiation with realistic expectations and preserved pressure. That positioning, combined with thorough preparation and honest self-assessment, determines whether you close on terms that meet your objectives.