Sellers rarely lose leverage at the negotiating table. They lose it at the letter of intent (LOI), because most LOIs include exclusivity, which stops you from talking to other buyers.
What is in a letter of intent?
- The price and how it will be paid (cash at closing, earn-out, vendor financing)
- Whether it's a share purchase or an asset purchase
- How working capital will be measured at closing
- What the buyer still needs to check in due diligence
- Your role after the sale
- Exclusivity: how long you agree to stop talking to other buyers
- Confidentiality
How do you compare letters of intent?
SHORT ANSWER
Look beyond the headline price. Ten million dollars paid at closing is very different from ten million tied to a risky earn-out.
| Payment type | What it is | Seller's risk |
|---|---|---|
| Cash at closing | Paid on closing day | None. This is the only certain money |
| Vendor financing | You lend the buyer part of the price | Depends on the buyer's performance, usually ranks behind the bank |
| Earn-out | Paid only if future targets are hit | High. You no longer control the business that has to hit them |
| Rollover equity | You keep a minority stake in the buyer's company | Illiquid, and paid out on the buyer's timeline |
| Holdback or escrow | Part of the price held to cover your obligations | Released on schedule, reduced by valid claims |
Also compare the length of exclusivity. Shorter is better for you.
Why is exclusivity so important?
SHORT ANSWER
Once you sign an LOI with exclusivity, you usually can't talk to other buyers for a set period. That's when your leverage drops. If the buyer finds a problem in due diligence and asks for a lower price, you no longer have other offers to fall back on.
Keep exclusivity periods short, and settle important terms in the LOI rather than leaving them for later.
Most letters of intent include exclusivity, so by the time the buyer starts checking your business, you have no other buyers to turn to. Every issue the buyer finds becomes a reason to renegotiate, and you have less power to say no.
A price reduction during exclusivity is called a re-trade. It is the structural weak point of almost every sale process.
The shorter the exclusivity period, the less time a buyer has to wear you down. Pair it with a well-organized data room so the buyer can move quickly.
Related: Why deals lose value in due diligence (and how to prevent it)
What is an Expression of Interest?
SHORT ANSWER
An Expression of Interest (EOI) is an earlier, non-binding note in which a buyer outlines their view of price and terms. Collecting EOIs from several buyers before signing an LOI lets you compare options while competition is still alive.
That's why we ask buyers for Expressions of Interest (EOIs) first. An EOI outlines a buyer's early view of price and terms without binding anyone, so you can compare options while competition is still alive.
What is the difference between the offer price and what you receive?
SHORT ANSWER
The number in the LOI is enterprise value. What lands in your account is equity value. To get from one to the other, take the enterprise value, subtract interest-bearing debt, add surplus cash, adjust for working capital against the agreed target, subtract debt-like items (such as customer deposits or deferred revenue), then subtract transaction costs.
Most mid-market deals are done cash-free and debt-free. You keep the cash in the company, your loans are repaid from the proceeds, and you hand over a normal level of working capital.
What is a working capital peg?
SHORT ANSWER
A working capital peg is the normal level of working capital (receivables plus inventory, less payables) the business must have at closing, usually based on a 12-month monthly average. About 60 to 90 days after closing, the actual figure is compared to the peg. If it comes in lower, your price drops dollar for dollar.
Two common traps: chasing receivables hard before closing to "take the cash with you" (it comes straight back at the true-up), and leaving construction holdbacks undefined until week nine. Agree the method in the LOI.
What this means for you
Every defence is built before you sign exclusivity: a short exclusivity period, your own quality of earnings review, an agreed working capital method, and a disclosure schedule that puts the bad news up front.
Sellers who disclose the difficult items early, agree the working capital method in the letter of intent and keep exclusivity short give buyers fewer reasons to re-trade.
Related: How to sell a business in Canada: the 12-month playbook