How Do You Evaluate a Letter of Intent (LOI)?

What should you look for in a strong Letter of Intent?

A well-written LOI should clearly define the major economic and structural terms of the proposed transaction. While additional detail will appear in the definitive purchase agreement, the LOI should provide enough information for both parties to understand the proposed deal before entering due diligence.

A strong LOI typically addresses:

• Purchase price
• Form of payment (cash, seller financing, earn-out, rollover equity, or a combination)
• Transaction structure (asset purchase or equity purchase)
• Working capital expectations
• Due diligence timeline
• Exclusivity period
• Financing contingencies
• Expected closing timeline
• Any significant post-closing obligations

Clearly defining these terms upfront helps reduce misunderstandings and minimizes the likelihood of material renegotiations later in the transaction.
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Is the purchase price the most important part of an LOI?

Not necessarily. Purchase price is only one component of the overall transaction.

Owners should also evaluate how much cash will be paid at closing, whether future payments depend on earn-out milestones, whether seller financing is required, how working capital will be calculated, and whether the buyer has financing or other contingencies that could delay or prevent closing.

In many cases, a lower purchase price with fewer contingencies may represent a stronger overall offer than a higher-priced proposal with significant uncertainty.
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What are common red flags in a Letter of Intent?

Not every LOI provides the same level of certainty. Some proposals leave important business terms undefined or include conditions that shift significant risk to the seller.

Common red flags include:

• A purchase price without a clear breakdown of how and when the seller will be paid.
• Long or open-ended exclusivity periods.
• Broad financing contingencies that allow the buyer to withdraw with limited consequence.
• Vague earn-out provisions without clearly defined performance metrics.
• Significant post-closing obligations that are not fully described.
• Material business terms described as "to be determined" or left for future negotiation.

An LOI does not need to answer every legal question, but it should provide enough clarity for both parties to understand the proposed economics and transaction structure before entering due diligence.
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How can you tell if a buyer is serious?

A strong LOI is only part of the equation. Business owners should also evaluate whether the buyer has the financial resources, experience, and commitment to complete the acquisition.

Indicators that a buyer is well-positioned to close may include:

• Demonstrated access to financing or proof of funds.
• Previous experience acquiring or operating businesses.
• A reasonable due diligence plan and timeline.
• A clear strategic rationale for the acquisition.
• Timely communication and responsiveness throughout the process.
• Willingness to negotiate fairly while continuing to move the transaction forward.

While no single factor guarantees a successful closing, evaluating both the buyer and the proposed terms can help owners distinguish between exploratory interest and a credible acquisition offer.
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What happens after an LOI is signed?

Signing an LOI typically begins the buyer's due diligence process. During this stage, the buyer verifies the financial, legal, operational, and commercial information provided by the seller.

If due diligence is completed successfully, the parties negotiate definitive purchase agreements, finalize financing, satisfy any remaining closing conditions, and prepare for the transfer of ownership.
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Can a buyer change the terms after an LOI is signed?

Yes. Although an LOI establishes the framework for a transaction, buyers sometimes seek to renegotiate the purchase price or other terms after due diligence has begun. This is commonly referred to as retrading.

Retrading may occur when due diligence uncovers information that was not previously disclosed, such as weaker financial performance, customer concentration, legal issues, or operational risks. However, in some cases, buyers attempt to improve the economics of the transaction simply because the seller is deep into the process and less willing to walk away.

A well-prepared business, complete financial records, and a competitive sale process can reduce the likelihood of retrading. When multiple qualified buyers remain interested in a business, sellers typically have greater negotiating leverage and are less vulnerable to significant changes in price or terms after signing an LOI.
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Should you accept the first LOI you receive?

Not always. The first Letter of Intent may not represent the strongest overall offer, particularly if the business has not been broadly marketed or multiple buyers have not had an opportunity to compete.

Evaluating multiple LOIs allows owners to compare not only purchase price, but also transaction structure, payment terms, contingencies, timing, and each buyer's ability to complete the acquisition. A competitive sale process often improves negotiating leverage and helps owners determine which buyer offers the strongest combination of value, certainty, and likelihood of closing.
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The bottom line

A Letter of Intent establishes the framework for a business sale and can significantly influence the outcome of the transaction. Looking beyond the headline purchase price—and carefully evaluating the proposed structure, contingencies, and the buyer's ability to close—can help business owners make more informed decisions before entering due diligence.

At Wisable, we help business owners evaluate Letters of Intent in the context of the entire transaction. By creating a competitive sale process, engaging multiple qualified buyers, and comparing offers holistically, we help owners negotiate favorable terms, reduce execution risk, and select the buyer best positioned to complete a successful closing.