What Should an LOI Resolve Before Diligence Begins?

On this page

1. What does the purchase price actually include?
2. Should the LOI name the transaction structure?
3. How long should exclusivity last, and what does the seller give up?
4. What should the LOI say about diligence, financing, and consents?
5. Which LOI provisions are binding, and which are not?
6. What goes wrong when the parties agree on price but not the deal?
7. What makes a letter of intent effective?
8. Frequently asked questions

In brief

A letter of intent should settle the economic bargain (cash at closing, seller notes, contingent payments and working capital), the proposed structure, exclusivity, the path to closing, and which provisions are binding. The detailed mechanics can wait for diligence, but the basic understanding of each should be in writing before either side spends real time and money.

Key Takeaways

1. 01Define the full payment structure, not just the headline price, before due diligence starts.
2. 02Settle working capital expectations, including cash, receivables, and any post-closing adjustment, in the LOI.
3. 03Negotiate exclusivity length and extensions around the buyer’s real financing and diligence timeline.
4. 04Confirm lender and third-party consent requirements early so the closing date stays credible.
5. 05State plainly which LOI provisions are binding and which are not.

When someone buys or sells a privately held business, one of the first documents on the table is a letter of intent, usually called an LOI. Many owners treat it as a formality: agree on a price, sign something that confirms the general idea, and let the attorneys sort out the details later.

That isn’t how I look at it as a transaction attorney. Some of the most consequential negotiations happen before anyone drafts the purchase agreement. The LOI sets the framework: the basic economics, the proposed structure, the conditions for moving forward, and the process for reaching a definitive agreement.

The LOI shouldn’t try to settle every legal issue; negotiating every detail this early can be counterproductive. But some issues need to be resolved up front. Otherwise the buyer and seller can spend weeks on diligence, attorneys, and accountants, only to discover they never agreed on the fundamental terms.

What does the purchase price actually include?

A buyer offers $5 million for a privately held business, the seller accepts, and both sides believe they have a deal. But what does that $5 million represent? Is it all cash at closing? Is the buyer assuming certain liabilities? Must the seller leave a set amount of working capital in the business? Is part of the price contingent on future performance? Will the seller finance a portion?

Those aren’t minor details. Consider two buyers who each offer $5 million for the same company. The first offers the full price in cash at closing, subject to customary adjustments. The second offers $4 million at closing, a $500,000 seller note, and another $500,000 contingent on the business hitting specific financial targets over the next two years. The headline number is identical. The offers are not. In the second deal, the seller takes on credit risk and performance risk, may wait years for the full amount, and may never receive part of it.

Figure 1

Same headline number. Two different offers.

Buyer one: $5 million

• $5 million cash at closing, subject to customary adjustments

Buyer two: also $5 million

• $4 million at closing
• $500,000 seller note
• $500,000 tied to targets over two years

That doesn’t make the second offer a bad one. A buyer can have legitimate reasons to structure a deal that way: bridging a valuation gap, preserving cash, or addressing uncertainty about future performance. But I want the LOI to state the economic bargain with enough specificity that both sides know what they are agreeing to before they spend real time and money. The basic payment structure shouldn’t be something we discover while drafting the purchase agreement.

Working capital is the other half of the economics. A buyer generally expects a business with the operating assets and liquidity to keep functioning after closing, which can include accounts receivable, inventory, and prepaid expenses.

Go deeper on working capitalHow Does Working Capital Affect the Purchase Price in a Dallas M&A Deal?

Expectations don’t always match. Suppose a seller agrees to sell for $5 million. The seller may assume that all cash belongs to the seller, that existing receivables will be collected for the seller’s benefit, and that certain liabilities stay behind. The buyer may assume the $5 million includes a normal level of operating working capital, receivables and inventory included, subject to an agreed calculation. The gap widens when the business carries substantial receivables and inventory.

The LOI doesn’t need a fully developed working capital formula, which usually takes financial diligence and input from accountants. It should still capture the basic understanding. Is the business being sold on a cash-free, debt-free basis? Will the seller deliver a normalized level of working capital? Which categories of assets and liabilities are included or excluded? Will the final price be subject to a post-closing adjustment? If the seller thinks $5 million means one thing and the buyer thinks it means another, the parties have agreed on a number. They haven’t agreed on the economics.

If the seller thinks $5 million means one thing and the buyer thinks it means another, the parties have agreed on a number.

Should the LOI name the transaction structure?

Most private company acquisitions are structured as an asset purchase or an equity purchase, though variations exist. In an asset acquisition, the buyer generally purchases specifically identified assets and assumes the liabilities agreed in the transaction documents, subject to applicable law. In an equity acquisition, the buyer purchases the ownership interests in the company itself, so the legal entity generally continues to exist along with its assets, contracts, and liabilities.

Neither structure is automatically better. Buyers often prefer asset deals because they can negotiate which assets they acquire and which liabilities they assume. An asset purchase still doesn’t eliminate every exposure to historical liabilities. In Texas, for example, the Comptroller explains that a buyer who closes without a certificate of no tax due can be liable for the seller’s unpaid state taxes up to the purchase price. The Comptroller’s rule requires requesting that certificate before the sale is completed. Sellers, for their part, may prefer an equity sale for tax reasons, simplicity, or other commercial considerations. Structure also changes tax reporting; in an asset sale that includes goodwill, both buyer and seller generally file IRS Form 8594, so your CPA or tax advisor should weigh in early.

Practical issues follow. In an asset purchase, valuable customer contracts may need to be assigned, and the contract language may require customer consent. In an equity purchase the contracting entity stays the same, but change-of-control provisions can still trigger consent. Licenses, permits, leases, employees, and financing can be affected too; I cover those trade-offs in Asset or Equity Purchase: What Changes?

Structure can influence the price, the allocation of liabilities, the tax consequences, and whether the deal is practical at all, so I don’t leave it for the lawyers to figure out at the end. It may change after diligence or tax analysis, and that’s reasonable. If one side has a strong preference or a firm requirement, though, it belongs on the table before the other side commits substantial resources.

How long should exclusivity last, and what does the seller give up?

Exclusivity is one of the provisions I think sellers most often underestimate. Most buyers will want a period after signing during which the seller stops negotiating with other potential purchasers. The buyer uses that window to complete diligence, arrange financing, and negotiate the definitive agreements.

From the buyer’s side, the request makes sense. Buyers engage attorneys, accountants, lenders, and other professionals, and they don’t want to spend those resources while the seller keeps shopping the company to competing bidders.

The seller’s side deserves equal attention. By agreeing to exclusivity, the seller may take the business off the market for a set period. Other buyers may move on, the seller loses leverage with them, and if the deal falls apart the seller may have to restart the process. I view exclusivity as a meaningful commercial concession, not boilerplate.

I view exclusivity as a meaningful commercial concession, not boilerplate.

When I review an exclusivity provision, I want to know how much time the buyer actually needs, and why. Is the buyer paying cash, or does the deal depend on third-party financing? Has the buyer already reviewed meaningful financial information? Are there regulatory, licensing, or third-party consent issues? I also want to know whether the buyer can close. A buyer asking for a long exclusivity period without meaningful progress on financing presents a different risk profile than a buyer with committed capital and an established diligence process.

None of this means a seller should refuse exclusivity; a reasonable period is often necessary to move forward. Its length and any extension rights should fit the specific transaction. When I represent a seller, I generally prefer defined deadlines, a clear end to the obligation, and extensions that are justified by the buyer’s actual progress. The goal is to give a serious buyer enough time to complete the transaction without restricting the seller indefinitely.

What should the LOI say about diligence, financing, and consents?

Another job of the LOI is to map the path from preliminary agreement to closing. Diligence is the buyer’s chance to investigate the business: financial statements, tax returns, customer contracts, employment agreements, corporate records, liabilities, litigation, licenses, and more.

What I want to avoid is an LOI that sets an aggressive closing date without considering what has to happen first. If the acquisition is bank-financed, the lender will have its own underwriting, collateral, documentation, and approval requirements. Those can affect the structure, the purchase agreement, any seller financing, and the closing date.

SBA-financed acquisitions add another layer, because the lender may restrict payments on a seller note, require subordination, or impose other terms. Under the SBA’s current rules, SOP 50 10, a seller note counts toward the buyer’s required equity only if it is on full standby, with no principal or interest payments for the term of the SBA loan. The seller must also subordinate its lien rights to the lender. The same rules prohibit seller earnouts in SBA-financed changes of ownership. Waiting until late in the deal to learn what the lender requires is a serious problem. Consents work the same way: approval from a landlord, a major customer, or another third party takes time.

Go deeper on seller notesHow Should Earnouts and Seller Financing Be Documented?

The LOI can’t resolve every diligence issue; that’s what diligence is for. It should still set realistic expectations on five points:

• How long the buyer has to conduct due diligence.
• What access to information the buyer will receive.
• Whether financing is a condition to closing.
• Which material third-party approvals are already known to be required.
• The anticipated timeline for negotiating and signing the definitive agreement.

Figure 2

A closing date has to survive everything that runs alongside it.

Exclusivity

Due diligence

Lender underwriting

Third-party consents

Definitive agreement

LOI signedClosing

Candor about known problems helps too. If a seller knows a major customer contract can’t be assigned without consent, it’s generally better to raise that early than to have it discovered just before closing. The aim is a credible path to closing, not an optimistic date.

Which LOI provisions are binding, and which are not?

One of the most common questions about letters of intent is whether they are legally binding. The answer depends on the language of the document and the obligations the parties intend to create.

In many private company acquisitions, the principal commercial terms of the LOI are meant to be non-binding. The buyer and seller are expressing their current intentions, not committing to complete the acquisition. They typically expect to negotiate and sign a definitive purchase agreement before either side is obligated to close.

That doesn’t make every provision non-binding. Some are frequently intended to be enforceable. Exclusivity is one. Confidentiality is another, although the parties may already have a separate nondisclosure agreement. Other binding provisions may cover transaction expenses, public announcements, access to information, or how certain disputes will be handled. The document should clearly separate binding provisions from non-binding ones and say explicitly whether either party must complete the deal before the definitive agreement is signed. I wouldn’t leave that to implication. A poorly drafted LOI can create uncertainty about the parties’ obligations, and that uncertainty can turn into a dispute if the deal falls apart.

Figure 3

Which provisions usually fall on which side of the line.

Often non-binding

• Purchase price and payment structure
• Other principal commercial terms
• Any obligation to complete the deal, until a definitive agreement is signed

Often written to be binding

• Exclusivity
• Confidentiality, unless a separate NDA already covers it
• Transaction expenses
• Public announcements
• Access to information
• How certain disputes are handled

A second issue matters just as much. Even expressly non-binding business terms carry practical weight. Say a seller signs an LOI with a particular price and payment structure, then decides after several weeks of diligence that those terms are no longer attractive. Depending on the document, the seller may have the flexibility to propose new terms. The buyer may reasonably answer that those were the terms on which it agreed to spend time, money, and effort investigating the business. The relationship gets strained, and the parties end up reopening issues they thought were settled.

Legal enforceability and commercial expectations are different things. An LOI can be largely non-binding and still set the direction of the entire transaction, which is why I don’t recommend treating it casually.

What makes a letter of intent effective?

Buyers and sellers will always come to the LOI from different positions. A buyer wants flexibility: time and access to investigate, assess risk, arrange financing, and negotiate the definitive agreements. A seller wants certainty about the economics, confidence that the buyer can close, and protection against spending months on a deal that falls apart. Neither view is unreasonable, and the LOI’s job is to build a framework that accommodates both.

Don’t judge the document by its length. A concise LOI may be entirely appropriate for a straightforward deal, while seller financing, retained ownership, regulatory issues, or significant third-party consents may call for more. The test is whether the parties understand the transaction they are proposing.

Figure 4

What belongs in the LOI, and what can wait.

Settle in the LOI

• Payment structure: cash, notes, contingent payments
• Cash-free, debt-free basis and normalized working capital
• Proposed asset or equity structure
• Exclusivity length and extension rights
• Diligence period and information access
• Financing condition and known consents
• Timeline to a definitive agreement
• Binding and non-binding provisions

Can wait for diligence

• The fully developed working capital formula
• Issues that only diligence can answer
• The full terms of the definitive agreement

Before you sign a letter of intent, make sure it does three things. First, it states the essential economic and structural terms. Second, it identifies the material risks, conditions, and requirements that could affect whether the deal closes. Third, it sets a reasonable process for diligence and negotiation, with binding and non-binding obligations clearly separated. The goal isn’t to win every point. It’s a commercially reasonable framework that lets both sides move forward with a shared understanding of the deal.

If you are preparing to buy or sell a Texas business, Escamilla Law Office’s mergers and acquisitions practice can review your LOI before you sign. For a quick look at your own preparedness, try the Transaction Readiness Check.

Frequently Asked Questions

More answers are on our M&A FAQs page.

Sources

1. U.S. Small Business Administration. SOP 50 10: Lender and Development Company Loan Programs (Version 8.1, effective October 1, 2026).
2. Texas Comptroller of Public Accounts. Buying an Existing Business (Publication 98-117).
3. Cornell Law School, Legal Information Institute. 34 Tex. Admin. Code Sec. 3.7, Successor Liability: Liability Incurred by Purchase of a Business.
4. Internal Revenue Service. About Form 8594, Asset Acquisition Statement under Section 1060.

About the author

Rick Escamilla

Rick Escamilla is the principal of Escamilla Law Office, which represents buyers, sellers and closely held companies in mergers, acquisitions and related ownership transactions across Texas. Before entering private practice, he worked in investment banking and corporate finance.

Attorney advertising. This article is for general informational purposes only and is not legal advice. Reading it does not create an attorney-client relationship. Escamilla Law Office, 7550 I-10, Ste 800-863, San Antonio, TX 78229. (210) 997-0025.