The headline is one term of nine
When a letter of intent arrives, most founders read the price first, and many read nothing else as carefully. That is understandable. The price is the number you have been thinking about for years. But a letter of intent (LOI) is a non-binding term sheet that sets out price, structure, and the key terms of the deal, and it usually grants the buyer exclusivity. Price is one term of nine.
The other eight decide how much of the price you receive, when, and at what risk. They also decide how much room the buyer will have to change the deal once you have stopped talking to anyone else. This article walks through each term and what a founder-friendly and a buyer-friendly version look like.
A letter of intent is non-binding, and founders sometimes read that as a reason not to worry about its detail. It is the opposite. Because the letter usually grants exclusivity, it is the last document you negotiate while other buyers are still interested. Everything it settles, it settles with competition in the room. Everything it leaves open will be settled later, without it.
None of this is legal advice. Your attorney reads every letter of intent before you sign it, and the purchase agreement that follows.
Price and structure
1. Price
The headline is usually stated as an enterprise value: a total for the business before debt, cash, fees, and structure. What matters is what that number assumes. Most letters assume the business will be delivered free of debt and cash, with a normal level of working capital, and with the earnings the buyer has underwritten. Change any of those assumptions and the headline moves.
- Founder-friendly
- A stated enterprise value, with its basis spelled out: the earnings figure it rests on and how debt and cash will be treated.
- Buyer-friendly
- A range, or a number conditioned on what diligence finds, so the price can move after exclusivity.
2. Structure
Structure is how the price is paid. Price is shorthand for a stack of layers: cash at close, escrow, a seller note, an earn-out, and rollover equity. Each layer arrives at a different time, with a different probability, and depends more on the buyer than the one below it.
| Layer | When you receive it | Who controls it |
|---|---|---|
| Cash at close | Closing day | Nobody, once wired |
| Escrow or holdback | After a set period, less any claims | The buyer's indemnity claims |
| Seller note | Over several years | The buyer's ability to pay |
| Earn-out | Only if agreed targets are hit | The buyer's operation of the business |
| Rollover equity | At the buyer's next sale | The buyer entirely |
From the playbook's consideration stack. Everything above cash at close is a bet on the buyer.
Two letters with the same headline can differ by millions in what you keep, depending on how much of the price sits in each layer.
- Founder-friendly
- Most of the price in cash at close, with any deferred layers sized deliberately and described in enough detail to judge them.
- Buyer-friendly
- A large share deferred or contingent, with the terms of each layer left for the purchase agreement.
Working capital, escrow, and indemnity
3. The working capital peg
A buyer expects the business to arrive at closing with a normal level of working capital: the receivables, inventory, and payables it needs to keep running. The working capital peg is that agreed normal level. If working capital at closing falls short of the peg, the price comes down. If it is higher, the price goes up. The peg is one of the terms founders most often learn about too late, because it rarely sounds important until the closing statement arrives.
- Founder-friendly
- The peg, or the method for setting it, agreed in the letter and based on how the business normally runs.
- Buyer-friendly
- The peg left to be set in diligence, when the buyer has exclusivity and the founder has no alternative.
4. Escrow and indemnity
An escrow, or holdback, is part of the price held back at closing for a period to cover claims under the purchase agreement. Indemnity is the promise behind it: the founder's commitment to make the buyer whole if what was said about the business in the agreement turns out to be wrong. A letter of intent often states the size and length of the escrow, and it may say how indemnity claims will be limited.
- Founder-friendly
- A modest escrow for a defined period, with the limits on indemnity claims stated in the letter.
- Buyer-friendly
- A larger escrow for a longer period, with the limits on indemnity left open for the purchase agreement.
Exclusivity and financing
5. Exclusivity and its length
Exclusivity is a period during which the founder agrees not to negotiate with other buyers. It is usually granted when the letter is signed, and it is the moment negotiating leverage turns. A founder's leverage rises through a process as buyers compete, peaks when several letters are on the table, and falls the moment exclusivity is granted to one of them. The length of that period, and what the buyer must do inside it, are terms in their own right.
- Founder-friendly
- A short, defined period, with the milestones the buyer must reach inside it, and an end to exclusivity if the buyer changes the price.
- Buyer-friendly
- A long or open-ended period, with no milestones and no consequence for a revised offer.
6. Financing contingency
A buyer that needs to borrow to pay the price may make the deal conditional on raising that debt. That puts the certainty of your sale in the hands of the buyer's lenders, who are not in the room and have not signed anything. The letter should say how the buyer is paying and how firm that money is.
- Founder-friendly
- Committed financing, or the equity in hand, and no financing condition.
- Buyer-friendly
- The deal conditional on financing the buyer has not yet arranged.
Your role after the sale
7. Employment and non-compete
Most buyers want the founder to stay for some time and to agree not to compete with the business after leaving. Both are reasonable in principle. The detail decides whether they are fair: the role, the authority that comes with it, the pay, how long it lasts, and how broad the non-compete is in time, geography, and activity.
- Founder-friendly
- A defined role with real authority and market pay, and a non-compete limited to the business as it is actually run.
- Buyer-friendly
- An open-ended role, a title without authority, and a non-compete broad enough to cover anything the founder might do next.
8. Transition
Separate from employment is the handover itself: how long the founder will help transfer relationships, knowledge, and the license if there is one, and what happens if the buyer wants more help than planned. A business that depends on its owner will face a longer transition, because the buyer is pricing the risk that the earnings leave with the founder.
- Founder-friendly
- A defined transition period with a clear end, and any help beyond it agreed separately.
- Buyer-friendly
- An open-ended transition, tied to an earn-out the founder cannot reach without staying.
What the letter does not say
9. What is silent
The last term is the one that is not there. Anything a letter of intent leaves out will be settled in the purchase agreement, after exclusivity, when the buyer holds the leverage. A silent letter is not a neutral one. It is a letter that leaves the hard questions for later.
Common silences include how the working capital peg will be set, how an earn-out will be measured and under whose accounting, who pays which transaction costs, what the founder will be asked to promise about the business, what happens to employees and their terms, and what the buyer may do if diligence finds something. Each is a term the buyer will propose once you can no longer compare its answer with anyone else's.
- Founder-friendly
- The terms that matter most to you written into the letter, even briefly.
- Buyer-friendly
- A short letter with a headline price and the rest left to the purchase agreement.
Negotiate before you sign
The playbook's leverage curve explains why all nine terms belong in the letter, and why the letter belongs in a process. Your leverage rises as buyers compete, peaks when several letters of intent are on the table, and drops sharply the moment you sign exclusivity with one of them. From that point the buyer has the diligence period, the purchase agreement, and time on its side.
The peak is the moment to negotiate price, structure, the working capital peg, escrow, the indemnity cap, employment terms, and the scope of the non-compete. After it, re-trades happen: a buyer that finds something in diligence, or simply decides it can, revises the price. The defense is the work done before the process began, when every issue a buyer could raise was found and either fixed or disclosed.
Your leverage peaks the day before exclusivity. It does not come back.
When several letters arrive, lay them out side by side, term by term, not headline by headline. For each one, walk the price down to what you would keep: the debt repaid, the fees, the working capital adjustment, the escrow, the deferred and contingent layers, the rollover, and the tax. Then mark how certain each part is and who controls it. The letter with the highest headline is often not the one that leaves the most in your account, and the gap between them only shows when the other eight terms are read.
Use the comparison to negotiate, not only to choose. A buyer whose headline you like but whose peg, escrow, or earn-out you do not can be asked to match the better terms in another letter, while it still has reason to.
Compare letters on take-home and certainty, not on the headline. And if only one letter has arrived, treat it as information about the market, not as the market itself.