Before you sign a letter of intent
If you find yourself holding a letter of intent (LOI), or you expect one soon, this is how it works and what to watch for before you sign. When someone wants to buy the company you spent years building and puts a number on paper, it feels good, and it should.
I’ve been on your side of that table. You feel comfortable with the buyer after the several conversations you’ve had. You’re content with the deal and the structure they’re offering. You’re still cautious and a little skeptical that all of it will actually get finalized, but there’s no reason not to keep moving forward.
What I learned then, and what I’ve seen again and again since, is that good deals and bad deals look almost identical at the LOI stage. The difference tends to show up later, when walking away is much harder. This article is about spotting it early, while you still have the leverage to do something about it.
What a letter of intent is, and what it isn’t
A letter of intent, or LOI, is a buyer’s written proposal for how a deal would work. It usually covers the price, how that price gets paid, what the buyer expects to review in due diligence, and how long you agree to negotiate exclusively with them.
Here’s the part owners don’t always hear clearly: most of an LOI is non-binding. The price at the top of the page assumes that everything the buyer finds in diligence matches what they expect. The pieces that usually are binding, like exclusivity and confidentiality, tend to protect the buyer more than they protect you.
So an LOI isn’t a promise to pay you that number. It’s an agreement to spend the next few months finding out whether they will, and during those months you’ve agreed not to talk to anyone else.
LOI warning signs and letter of intent risks to watch for
None of these automatically means a deal is bad. Each one is a red flag worth slowing down for, and a few of them together should make you very careful.
A long exclusivity period. Once you sign, you typically can’t talk to other buyers until the exclusivity window closes. The longer that window runs, the more leverage shifts to the buyer, because your other options go cold while you wait.
A big number with vague terms underneath it. If the letter is specific about the price and fuzzy about how you actually get paid, pay attention. How much is cash at closing, how much is held back in escrow, how much depends on an earn-out, and how much you’re expected to roll into the new company all change what that headline number is really worth to you.
Price that depends on the future. An earn-out ties part of your payment to how the business performs after you’ve handed over the keys. Sometimes that’s reasonable. It becomes a problem when the targets are hard to hit or when the buyer controls the decisions that determine whether you hit them. It’s an even bigger problem when the buyer plans to layer additional expenses onto the company after closing, because those costs directly affect your ability to hit the gates that unlock the earn-out.
Room to adjust after diligence. Watch for language that makes the price subject to the buyer’s satisfaction, or that leaves key terms like the working capital target undefined. Loose language at the LOI stage is often where a lower number comes from later.
Pressure to sign quickly. A serious buyer will give you time to understand what you’re signing. A deadline that doesn’t leave room for your own review is a signal in itself.
Only one buyer at the table. When there’s no competition, the buyer sets the pace and the terms. You have much less leverage to push back on anything in the letter, or on anything that changes after you sign it.
How a retrade happens
A retrade is when a buyer lowers the price after you’ve signed the LOI, usually late in due diligence. It rarely arrives as bad news delivered plainly. It arrives as a list of findings and a new number.
The reason it works is timing. By the time a retrade shows up, you’ve usually spent 60 days or more in due diligence. You’ve opened your books, answered question after question, and put a lot of your own energy into getting the deal done. You’re tired, other buyers have moved on, and starting over feels impossible. Some buyers count on exactly that.
At the International Roofing Expo this year, we walked through two real examples. One owner had a deal at $16 million that was cut to $7 million. Another had a deal at $12 million that was cut to $5 million. Both cuts came at the last minute, when the owner’s choice had narrowed to taking the lower number or walking away from months of work.
Not every price change is a retrade. Sometimes diligence turns up something real, and an honest adjustment is part of an honest deal. The problem is the buyer who planned the cut from the start and used the LOI to take you off the market.
What changes the outcome
You can’t stop a buyer from attempting a retrade. You can make it much harder for one to work.
That starts before the LOI is signed. It means financials prepared for a buyer’s review, an annual profit number you can defend line by line, and terms in the letter specific enough to hold someone to. It continues through diligence, with someone on your side who knows what’s normal, pushes back on findings that don’t hold up, and keeps other options alive so you’re never negotiating with only one door open.
That’s the job of an advisor, and it’s very hard to do for yourself when it’s your company, your people, and your family’s future on the line. Our firm comes down to four words: Former Owners. Helping Peers. We’ve sat where you’re sitting, and we get paid the way you’d want to pay someone in our position. $0 until close. If we don’t get the results you want, you pay nothing.
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