Negotiate the LOI Like It Binds: 7 Terms to Lock Before You Grant Exclusivity

On November 19, 1985, a Houston jury told Texaco to pay Pennzoil $10.53 billion, $7.53 billion in actual damages and $3 billion in punitive damages, at the time the largest civil verdict in American history. Texaco had not stolen a factory or a patent. It had bought Getty Oil after Pennzoil and Getty's controlling shareholders had shaken hands on a preliminary deal that was never turned into a signed merger agreement. Fourteen months later Texaco filed for Chapter 11, and it eventually settled for $3 billion.

Most business owners will never sign a document worth billions. But almost every one of them will, at some point, sign a letter of intent, and most will treat it as a polite formality before the "real" negotiation starts. That is the most expensive misunderstanding in M&A.

The letter of intent is where a deal is actually decided, because it is the last moment when both sides still have alternatives. Once exclusivity starts, the seller has taken the business off the market and the buyer has started spending money on lawyers and accountants. Every term you leave vague becomes a negotiation you conduct with less leverage.

The numbers show what happens next. According to Axial's 2025 dead-deal data, covering 75 failed lower-middle-market transactions, diligence findings outside the quality of earnings review killed 25.3% of broken deals, a quality-of-earnings gap killed another 21.3%, and failed renegotiations, the famous "retrade," killed 14.7%. Advisers such as Kadenwood Group estimate that roughly a third of signed LOIs in that market never close.

Our group was founded in 1890 and today runs eight active businesses selling into more than 75 countries. We have sat on both sides of the table, as buyers and as sellers, and the lesson is always the same. Here are the seven terms I insist on settling before I grant, or accept, exclusivity.

Term 1: Define the price mechanism, not just the headline number

"We will pay $20 million" is not a price. It is a starting point for an argument. Is that enterprise value or equity value? Is it cash-free and debt-free? What level of working capital must the business deliver at closing?

That last question is where most money quietly changes hands. SRS Acquiom's 2025 Working Capital Purchase Price Adjustment Study, covering more than 1,200 private-target acquisitions, found adjustment mechanisms in more than 90% of deals, up from about half a decade ago. A working capital target, the "peg," set a few points too high can take hundreds of thousands off the seller's proceeds without anyone ever mentioning the headline price again.

Put these in the LOI:

• Enterprise value, and the definition of debt and cash that bridges it to equity value.
• How the working capital target will be set, ideally a trailing twelve-month average with seasonality considered.
• Any escrow or holdback for adjustments, and its size.

Term 2: Spell out how the price will be paid

A price paid entirely in cash at closing and the same price paid half in an earnout are two different deals. Sellers who accept a vague "structure to be agreed" usually discover that the structure was the negotiation.

If the consideration includes a seller note, an earnout or rolled equity, the LOI should state the percentage, the term and the basic mechanics. For a seller note, that means interest rate, maturity and whether it is subordinated to the bank. For an earnout, it means the metric, the measurement period and who controls the decisions that drive it. We explained the tools for closing a valuation gap in our guide to earnouts, seller notes and deal structure.

Term 3: Make exclusivity short, conditional and earned

Most letters of intent contain a no-shop clause in which the seller agrees to stop talking to other buyers. Periods of 30 to 90 days are common, and they are one of the few provisions that are legally binding.

For the seller, exclusivity is the moment leverage transfers. For the buyer, it is protection for the money about to be spent. A good exclusivity clause protects both sides by tying the period to progress, not to the calendar alone.

• Match the length to a realistic diligence plan, not to the buyer's wish list.
• Allow extensions only if agreed milestones have been met, such as a draft purchase agreement delivered by day 30.
• Let exclusivity fall away automatically if the buyer proposes a lower price or materially worse terms.
• Consider a cost reimbursement or break fee when one side walks away without cause.

Term 4: Agree the scope and timetable of due diligence

With diligence findings behind almost half of the failed deals in Axial's sample, the diligence plan is not an administrative detail. It is a risk map.

The LOI should say what the buyer intends to examine, who will do it, and by when. That includes whether a quality-of-earnings report will be commissioned, which contracts and customers are in scope, and the rules for contacting employees, customers and suppliers, which should always require the seller's prior consent.

For buyers, a clear scope forces you to name your real concerns early. For sellers, it prevents a fishing expedition that drags on while the business sits off the market. If you are on the buying side, keep our list of due diligence red flags next to the plan.

Term 5: Name every condition to closing now

Deals rarely die because of a condition nobody saw. They die because of a condition someone saw and did not write down: bank financing, a landlord's consent to assign the lease, a franchise or dealer agreement that requires the brand's approval, regulatory clearance, or a key customer contract with a change-of-control clause.

If a condition can stop the closing, it belongs in the letter of intent, with the party responsible for satisfying it. A financing contingency deserves particular attention. Sellers should ask how much of the price depends on debt, which lender is involved and how advanced the conversation is. Axial's data shows financing constraints still killed about one failed deal in ten.

Term 6: Be precise about what binds and what does not

Most letters of intent say the business terms are non-binding while confidentiality, exclusivity, costs and governing law are binding. That split is sensible, but the drafting has to match the intention.

Language such as "the parties will negotiate in good faith" can turn a non-binding term sheet into a very expensive obligation. In SIGA Technologies v. PharmAthene, the Delaware courts found that SIGA had breached its promise to negotiate a license in good faith, consistent with an attached term sheet, and in December 2015 the Delaware Supreme Court upheld an award of more than $100 million in expectation damages. The term sheet itself said it was not binding.

Pennzoil's case was built on the same fault line: conduct and statements that suggested a deal was done, even though the formal documents were not. The practical rule is simple:

• State expressly which clauses are binding and that everything else is not.
• Avoid "agreement in principle" language and public announcements before signing.
• Have counsel review the good-faith and exclusivity wording before anyone signs.

Term 7: Settle the people questions before they become price questions

The last term is the one founders most often postpone, and the one that most often reopens the price: what happens to the people.

Will the seller stay for a transition, and for how long, on what salary? Which key employees must stay, and will retention bonuses be paid by the buyer or deducted from the price? How broad will the non-compete be, in geography and years?

If the business depends on the seller or on two or three managers, their future is part of the price, and the LOI is the place to say so. Leaving it to the purchase agreement means negotiating it when the seller is already emotionally committed and the buyer has already spent its diligence budget.

Key Takeaways

• The letter of intent is the last moment both sides have alternatives. Treat it as the real negotiation, not a formality.
• A price is a mechanism: enterprise value, the debt and cash definitions, and the working capital target all belong in the LOI.
• State how the price will be paid, including the percentage and terms of any seller note, earnout or rolled equity.
• Tie exclusivity to milestones, keep it short and let it lapse if the buyer tries to cut the price.
• Diligence findings sank almost half of the failed deals in Axial's 2025 sample, so agree the scope and timetable up front.
• Write down every condition to closing, especially financing and third-party consents.
• Be explicit about which clauses bind. "Negotiate in good faith" can cost more than $100 million.

Frequently Asked Questions

What are the essential components of a letter of intent?

A letter of intent for an acquisition should cover the price and how it will be calculated, the form of consideration, the deal structure (asset or share purchase), the scope and timetable of due diligence, conditions to closing, exclusivity, confidentiality, the treatment of key people, and a clear statement of which provisions are binding. The more of these are defined in the LOI, the fewer will be renegotiated later.

Is a letter of intent legally binding?

Usually only in part. Most LOIs make the business terms non-binding while confidentiality, exclusivity, costs and governing law are binding. However, courts can enforce obligations such as a promise to negotiate in good faith, as SIGA Technologies v. PharmAthene showed, so the wording must match what the parties intend.

How long can an exclusivity period for an LOI last?

There is no fixed legal limit; the period is whatever the parties agree. In practice, exclusivity periods of 30 to 90 days are common for private company acquisitions, with larger or more complex deals at the longer end. Sellers should link any extension to agreed milestones rather than granting it automatically.

What are some common mistakes to avoid in a letter of intent?

The most common mistakes are agreeing a headline price without defining working capital, debt and cash; leaving the payment structure "to be agreed"; granting long exclusivity with no milestones; ignoring conditions such as financing or landlord consent; and using vague good-faith language that creates obligations the parties did not intend.

What happens after an LOI is signed?

The buyer carries out due diligence, typically financial, legal, tax and operational, while lawyers draft the definitive purchase agreement. Financing is finalized, third-party consents are sought, and the parties negotiate the representations, warranties and indemnities. If no deal-breaking issues emerge, the parties sign the purchase agreement and move to closing.

One thing to do this week

If you have a deal under discussion, take the draft letter of intent and highlight every sentence that contains "to be agreed," "customary" or "in good faith." Each highlight is a negotiation you are postponing until you have less leverage. Settle the three most valuable ones before anyone signs, and remember that sometimes the best outcome of that exercise is the deal you do not do.

Explore the eight businesses of Manzanos Enterprises to see how a group founded in 1890 builds and buys companies for the long term.