Selling a Business

Reading a Letter of Intent as the Seller

Read a letter of intent the way the buyer wrote it: a mostly non-binding price paragraph wrapped around a handful of binding obligations, with every unresolved term silently allocated to the party with more leverage later.

  • Advanced
  • 8 min total
  • 12 chapters

What decision this helps you make: What to negotiate into a letter of intent before signing, what to leave for the purchase agreement, and when to refuse to sign at all.

What this topic is

A clause-by-clause reading of the seller-side letter of intent: which provisions are legally binding and which are not, how the price paragraph interacts with the working capital and debt definitions, what an unresolved term costs when it resurfaces after exclusivity begins, and what a court may do with an "agreement to negotiate in good faith."

Why it matters

The letter of intent is signed at the moment of maximum seller leverage and governs the period of minimum seller leverage. Almost every term left vague in it is resolved against the seller later, because by then the seller is exclusive, has spent money, and has told people. Ten extra days spent on the letter routinely outperforms ten weeks of negotiation on the purchase agreement.

Who should learn it

Owners with a letter of intent in front of them, CFOs and advisers reviewing one, and anyone about to grant exclusivity.

What you will understand

  • Which provisions in a letter of intent bind and which do not, and why the distinction is drafted rather than assumed
  • The eight terms that must be resolved before signing, and what each costs if deferred
  • How the price paragraph interacts with cash-free debt-free mechanics, the working capital peg, and transaction expenses
  • What courts have done with binding good-faith negotiation obligations in preliminary agreements

Prerequisites

Common misconception

"It is non-binding, so we can sort the details out later." The exclusivity provision is binding, and it is the only one that matters for the next ninety days. Once it is signed, every unresolved term is negotiated by a seller who cannot walk to anyone else. "Later" is not a neutral time — it is the time when you have the least power you will ever have in this transaction.