The LOI Response Hierarchy - What to Negotiate Before Signing

The letter of intent lands in your inbox at 4:37 on a Tuesday. Nine pages, fourteen defined terms, and an instinct screaming at you to push back on every line.

Here’s what we wish more first-time sellers knew: most of those lines won’t move the needle. Three or four will. The trick is figuring out which is which before you start typing comments into the margin.

Sellers who treat every clause as equally important burn through the buyer’s patience on lines the other side was never going to move on. By the time they get to the clauses that actually shape their take-home check, he’s dug in and willing to give nothing.

So before you mark up a single comma, sort the document into three piles.

Tier One: The Terms That Actually Move Money

Four provisions decide your net proceeds, your risk after closing, and how much pull you have left at the table when diligence starts. Get them wrong and you can give up six or seven figures in real money.

Purchase price structure. The headline number is the trap. A $5 million all-cash deal almost always beats a $5.5 million deal where $750,000 is parked in an earnout tied to next year’s revenue. Look at how the money breaks down: cash at closing, seller note, earnout, escrow holdback. Each piece carries a different risk and is worth a different amount in your pocket. (We’ve watched sellers celebrate a higher headline only to collect 70% of it eighteen months later, after a working capital adjustment they didn’t see coming.)

The indemnification cap. It caps how much you can be clawed back for breaches of reps and warranties. Initial LOIs come in anywhere from 10% to 100% of purchase price. The math gets real fast. On a $5 million deal, a 15% cap means your exposure tops out at $750,000. A 50% cap puts $2.5 million on the table. That gap, $1.75 million, sits on the line based on which sentence in the LOI you accept.

Exclusivity duration. Sellers obsess over price and skim past the exclusivity clause. Then they spend four months locked into one acquirer who senses he has no competition and hardens every position. We had a client last year, a manufacturer doing $14 million in revenue, who came to us with a draft giving 120 days of exclusivity. We pushed for 60 with a single 30-day extension tied to a financing milestone. He agreed without much fight. “Felt like a lot of work to save sixty days,” our client told us afterward. The deal closed in 71. Without the shorter clock, his runner-up bidder would have walked, and he would have negotiated the rest of the deal alone.

Working capital target. “Adequate working capital at closing” is not a working capital target. It is an ambush. Push for a specific dollar number, a defined formula, and an example calculation in the LOI itself. Otherwise you’ll spend the last week before closing arguing about whether prepaid insurance counts as a current asset.

Tier Two: Worth a Look

Most of these sit inside market ranges. You can negotiate them, but the room to move is narrow. Pushing hard rarely changes the outcome by enough to be worth the goodwill.

The escrow hold is one. For a clean middle-market service business, 10-15% of purchase price held for 12-18 months is standard. Manufacturing or healthcare, 15-20%. Pushing inside those ranges tells the other side you’re worried about your own reps. The conversation outside those ranges, say a 25% hold for 24 months on a clean services deal, is different.

Diligence scope matters less than diligence access. The list of document categories will get rewritten three times before signing anyway. The clause that lets their people contact your customers and employees directly is the one to worry about. Hold the line on communications running through you. Let them have the data room.

Non-competes and non-solicits get more emotional than they should. The geography should match where you actually compete. The duration should match how long you’ll stick around after closing. If you’re walking on day one, push for 24 months. If you’re earning out for three years, expect five. (We had a client agree to “continental United States” on a regional services business that operated in three states. Five years later, he still couldn’t open a competing shop two states over. He thought it was boilerplate. It wasn’t.)

Transition services and post-close employment terms need specifics in the LOI even though most sellers aren’t thinking about them yet. Vague language here turns into “available as needed” in the purchase agreement, which means whatever the buyer decides it means in October.

Tier Three: Don’t Bother

Confidentiality clauses that mirror the existing NDA. Expense allocation. Governing law. Boilerplate reps and warranty categories.

Your lawyer should confirm they’re standard. After that, leave them alone. The patience you spend pushing governing law from Delaware to your home state could have gone toward your indemnification cap. Same pool. Doesn’t refill.

(One exception. An unusual issue can flip the math. A regulatory exposure, an open lawsuit, a customer concentration problem. The basic compliance rep we treated as boilerplate yesterday becomes the paragraph everyone fights over today. We’ve seen it need a carve-out for an FDA inquiry that hadn’t yet become a finding. The category isn’t always Tier 3. It’s just usually Tier 3.)

How To Spend Your Chips

Every point you raise spends something. The other side is watching how you negotiate the LOI as a preview of how you’ll handle the next 90 days. Raise ten issues and you’ve signaled that diligence and the purchase agreement will both be a slog. Raise three and you’ve signaled you know what matters.

We tell clients to walk in with three to five priorities and a phone call requested before any markup goes back. Talk first. Listen to what the other side cares about. Then send your written comments as a record of what you’ve already agreed to on the call, not as an opening salvo.

Going in with a number for each priority helps. Not a wish. A walk-away. If your indemnification cap walk-away is 20% of purchase price and they hold at 35%, you know exactly when the conversation has crossed into territory you can’t accept. Without that number, every push from across the table feels like the one that might be the last, and you start agreeing to things you’ll hate two months later.

Sometimes this approach doesn’t hold. We had a client with a regulatory exposure that turned every standard rep into a custom negotiation. The “three to five priorities” rule didn’t apply because nine things were genuinely Tier 1 for him. He had to push back on a lot more than four, lost his preferred buyer in the process, and closed three months later with the second one at a slightly lower price. Picking your battles works when you have battles to pick. When the situation actually demands twelve, you fight twelve. We weren’t sure his second buyer would still be at the table after the delay. He was, but we’d told our client to assume he wouldn’t be.

Where This Falls Apart

The biggest mistake is marking up everything. The second is fixating on price while accepting a process that crushes you. The third is treating the LOI like it’s binding when most of it isn’t.

The mark-up-everything seller hits exclusivity, governing law, the working capital definition, diligence scope, the rep categories, and the expense allocation in the same pass. The acquirer reads version 2 and concludes that the next ninety days will look the same. Some keep going. A surprising number don’t. The signal kills the deal, not any individual change.

The price-focused seller wins on number and loses on time. She gets her $5.2 million but accepts 120-day exclusivity, unrestricted customer contact, and a “to be agreed” working capital target. The other side now controls the calendar, can talk to whoever he wants, and gets to define adequate cash at closing in his favor. The headline price holds. The take-home doesn’t.

The seller who treats the LOI as binding fights battles that don’t have to be fought yet. Most LOI clauses are explicitly non-binding, which means you can flag a concern at the LOI stage and resolve it cleanly in the definitive documents three weeks later. Fighting for the perfect indemnification language now burns chips you’ll need for the actual fight on the same paragraph in the purchase agreement.

The fix for all three is the same. Categorize. Pick three to five. Talk first. Save the rest for the binding documents.

We closed two deals in the same quarter last year, six weeks apart. Same headline price. Roughly the same business: a $7 million distribution company in one case, a $7.2 million distribution company in the other. One seller pushed back on the four things that mattered, accepted the rest, and closed in 73 days with a take-home check 9% higher than the LOI implied. The other marked up twenty-two clauses, watched her buyer go quiet for three weeks, eventually closed at the original number, and gave back $340,000 in a working capital adjustment because the LOI definition was vague and the purchase agreement followed it.

Same buyer pool. Same advisor. Different chips, spent differently.

What you fight for matters. What you let pass matters just as much. A letter of intent is not a contract. It’s a forecast of how the next three months will go. Make sure that forecast says you’re easy to deal with on the things that don’t move the needle, and immovable on the things that do.