The letter of intent is the last document you negotiate while a competing buyer still exists. Fix the money there: escrow, indemnity cap and basket, the working capital peg, cash and debt, tax structure, earn-out mechanics, non-compete scope, expenses, your post-closing role, and who drafts first. Everything you defer moves toward the buyer.
Why does a seller’s leverage peak the day before you sign the letter of intent?
Seller leverage peaks the day before exclusivity is granted, because that is the last day two buyers can want the same company at once. After you sign, you have one counterparty, a diligence clock and rising professional costs. Every unresolved term is then negotiated in a market of one.
Do not assume a letter labeled non-binding carries no weight. In SIGA, the license term sheet said it was non-binding, but a bridge loan and a merger agreement separately required good-faith negotiation of that license in accordance with it. The Delaware Supreme Court affirmed the bad-faith breach, held expectation damages available, and in 2015 affirmed $113 million plus interest and fees. Delaware reasoning binds only where Delaware law governs your deal, and at this size it often does not.
Case: SIGA Technologies, Inc. v. PharmAthene, Inc., 67 A.3d 330 (Del. 2013); damages affirmed, Del. No. 20, 2015.
A letter of intent is not a promise to close. It is a decision about which terms you negotiate with competitors in the room and which you negotiate alone.
Which economic terms must be fixed in the letter of intent?
Fix every term that converts to dollars: escrow and its release date, indemnity cap and basket, the working capital definition and peg, cash and funded debt, structure and any tax election, earn-out mechanics and supporting covenants, non-compete scope, expenses, your post-closing role, and who drafts first.
Buyers rarely refuse these terms. They keep them off the agenda, call them points for the definitive documents, then state their own positions in the first draft, when the other bidders are gone.
| Term | Buyer’s first draft opens with | Write this instead |
|---|---|---|
| Escrow | Bigger, longer, not capping recovery | Stated percentage, stated release date, your sole-recourse ask except fraud |
| Cap and basket | Cap above escrow, long survival, wide carve-outs | Cap equal to escrow, stated survival, dollar basket, closed carve-outs |
| Working capital | Target set on the buyer’s methodology | Definition, accounts in and out, sample period, the peg |
| Cash and debt | Cash swept, disputed items called debt | You keep cash, buyer takes it debt-free, named debt-like items |
| Structure and election | Asset deal, or an election requested later for free | Structure and election stated, and how you are paid if it costs you tax |
| Earn-out | Buyer discretion, no supporting covenants | Metric, formula, period, accounting rules, operating covenants |
| Non-compete | Long term, undefined territory, every relative signing | Years, territory, restricted business, named signatories, carve-outs |
| Your role | Full-time, at-will, non-compete from termination | Title, hours, term, pay, non-compete from closing, lender-compliant role |
Two cautions on that last column. A sole-recourse escrow and a cap equal to the escrow are asks you trade for, not defaults. Insurance-backed indemnity is uncommon in deals this size, so do not let a buyer price yours as if a policy sat behind it.
What does “customary terms” actually mean in a letter of intent?
The phrase “customary terms” in a letter of intent enumerates nothing. It has no legal content, no dollar value, and no published definition that binds either side. It is an agreement to argue later, at the moment you have the least room to argue. Strike it and replace it with numbers, dates and named accounts.
One public benchmark exists. The current American Bar Association Private Target Deal Points Study, released December 19, 2025, covers 139 publicly available purchase agreements from 2024 and early 2025, and access runs through Business Law Section membership. Those are public filings, far larger than most privately held businesses. It reported representation and warranty insurance in about 63 percent of agreements and earn-outs in 18 percent. That rate is larger-deal practice, not yours.
Data: ABA Business Law Section, Private Target Mergers and Acquisitions Deal Points Study, 2025 edition.
When a buyer calls a term customary, ask which agreement, in which deal, at what size. A shrug means it is proposed, not customary.
How should the working capital peg be written in the letter of intent?
Working capital means current assets minus current liabilities, usually excluding cash and debt, and it is defined by your agreement, not by convention. The letter should state the target, or at minimum the accounting basis, the accounts in and out, and the sample period. A target set after exclusivity is set by the buyer.
The definitions do the work. In Chicago Bridge, the buyer used the post-closing adjustment to press claims that the seller’s historical financials did not comply with GAAP. The Delaware Supreme Court reversed Chancery, held those claims belonged to the representations rather than the true-up, and directed that the buyer be enjoined from raising them before the independent auditor.
Case: Chicago Bridge & Iron Co. N.V. v. Westinghouse Electric Co. LLC, 166 A.3d 912 (Del. 2017).
The mechanism you wrote is the mechanism you get. Write it:
- The sample period: the average of the last twelve month-end balances.
- The accounting basis, and which controls if GAAP and practice conflict.
- Excluded accounts: cash, debt, taxes, deferred revenue, accrued time off.
- Dollar-for-dollar or a collar, who prepares the statement, your days to object.
Does the tax structure have to be in the letter of intent?
Yes. The asset-versus-stock decision and any tax election belong in the letter, because the elections that hand a buyer a stepped-up basis need your signature when they are available at all. A buyer holding exclusivity asks for it free. Stated as of August 2026, the machinery works as follows.
A section 338(h)(10) election treats a qualifying stock purchase as a deemed asset sale, but it is narrow. The buyer must be a corporation making a qualified stock purchase, and the target an S corporation or corporate subsidiary. It is joint; for an S corporation target every shareholder must consent, including those not selling. Section 336(e) covers a qualified stock disposition and needs no corporate buyer. Neither exists if your company is an LLC or partnership for tax purposes, so check your entity before treating consent as leverage.
Allocation is the other half. In an applicable asset acquisition both sides report it on IRS Form 8594, filed with the return for the taxable year including the purchase date, using the residual method. Inconsistent numbers invite examination, so agree the method in the letter. State treatment varies and moves; confirm yours the month you sign.
Law: 26 U.S.C. 338(h)(10), 336(e), 1060; 26 C.F.R. 1.338(h)(10)-1, 1.336-1, 1.336-2(h), 1.1060-1; IRS Form 8594, rev. 11/2021. Guidance: SBA SOP 50 10 8 (June 1, 2025); SOP 50 10 8.1 (loans numbered on or after October 1, 2026); SBA Form 155.
If your buyer is using an SBA 7(a) loan, the program rules shape your paper. SOP 50 10 8 governs applications through September 30, 2026; SOP 50 10 8.1 applies to loans numbered on or after October 1, 2026. Under version 8, a complete change of ownership needs at least a 10 percent equity injection, and your seller note counts toward it only on full standby, no payments for the life of the SBA loan, capped at half the injection. Your note may be unpayable for a decade. You must also exit: no officer, director, stockholder or employee role, consulting capped at 12 months, 24 under version 8.1.
What has to be in the letter of intent about an earn-out?
An earn-out means part of your price depends on the business hitting stated numbers after you no longer control it. The letter of intent should state the metric, the formula, the measurement period, the accounting rules, and the operating covenants in principle. Courts enforce the covenants you wrote, not the ones you assumed.
In Winshall, sellers argued the buyer should have seized an opportunity that would have raised their earn-out; the Delaware Supreme Court held the implied covenant of good faith and fair dealing could not supply that obligation. The Auris litigation against Johnson & Johnson shows the same limit. Chancery found milestone-covenant breaches in 2024 and awarded more than $1 billion; in January 2026 the Delaware Supreme Court reversed the holding resting on the implied covenant and vacated those damages, affirming the fraud findings in part.
Cases: Winshall v. Viacom International Inc., 76 A.3d 808 (Del. 2013); Fortis Advisors LLC v. Johnson & Johnson (Del. Ch. 2024), rev’d in part, No. 490, 2024 (Del. Jan. 12, 2026).
An express covenant that names the obligation is worth money. Anything a court must imply is worth nothing. Name what the buyer must maintain: the sales team, the pricing, the product line, the accounting method for the metric, and no buyer overhead in your numbers.
What non-compete should you agree to in the letter of intent?
The non-compete belongs in the letter as numbers and lists: years, territory, the defined restricted business, who signs, the carve-outs. Federal law will not save you from an overbroad one. The FTC’s Non-Compete Clause Rule was set aside in 2024 and the agency dropped its appeals in September 2025. State law governs.
State law can cut against the buyer too. California voids most non-competes, excepting a seller of the goodwill of a business or of an entire ownership interest, limited to the area where the business was carried on. In Samuelian, a California Court of Appeal held in 2024 that a partial sale falls outside that exception, though the covenant may still be tested for reasonableness. So in a partial sale, structure and covenant must be designed together. Other states draw the line differently.
Authorities: FTC Non-Compete Clause Rule, 16 C.F.R. Part 910, set aside in Ryan LLC v. FTC (N.D. Tex. 2024), appeals dismissed September 2025; Cal. Bus. & Prof. Code 16600, 16601; Samuelian v. Life Generations Healthcare, LLC, 104 Cal. App. 5th 331 (2024).
How long should exclusivity run, and what should end it early?
Exclusivity should run 45 to 60 days, sized to the buyer’s actual diligence and financing plan rather than to a round number. Ask for the diligence list, the quality of earnings provider, the lender or committee schedule, and the date the buyer’s counsel delivers the first draft. Then build those dates into the letter as lapse conditions.
- Buyer engages its accounting diligence provider by a stated date.
- Buyer delivers a lender term sheet or written credit approval by a stated date.
- Buyer’s counsel delivers the first draft purchase agreement by a stated date.
- Exclusivity lapses if the buyer moves price, structure, escrow, the peg or the non-compete beyond a stated tolerance.
- A stated outside date to sign, after which the letter expires without notice.
A buyer borrowing through the 7(a) program usually needs longer. Give that time in dated increments tied to lender milestones. No public dataset tracks how many signed letters at this size close, so treat failure as a real outcome and charge for the quiet period.
What should you get for an extension, and how do you keep the runner-up warm?
Treat every extension request as a fresh negotiation. Grant two or three weeks at a time, and only against something signed and dated: confirmation of price, structure, escrow and the peg; a closed issues list; cost reimbursement if the buyer walks without cause; or an escrow deposit applied at closing.
Then read the exact words of the no-shop. Most bar soliciting, initiating, encouraging or negotiating with other buyers. Fewer bar you from keeping your own house in order. Negotiate that definition down to affirmative solicitation and keep the machinery of a restart intact: hold the second bidder’s confidentiality agreement in force, keep the data room current, and diarize the date exclusivity ends. Never let it lapse by silence while you keep working.
Exclusivity is not a blindfold. It is a promise not to shop, sized in days, conditioned on the buyer doing the work it said it would do.
What are your first steps this month?
Rewrite the letter of intent you have, or the one you expect, into a document with numbers in it. None of this requires a new deal. It requires dates, dollars and named accounts on paper before exclusivity begins. Four steps, before you sign anything granting it.
- Build the term grid. Escrow, cap, basket, peg, cash and debt, structure and election, earn-out, non-compete, expenses, your role. Any blank row is one the buyer fills in later.
- Compute the peg yourself. Average the last twelve month-end balances, list every account in and out, and attach it as a schedule.
- Get the tax answer first. Model asset versus stock and confirm whether a 338(h)(10) or 336(e) election is available at all, given your entity and the buyer’s, as of August 2026.
- Size exclusivity to the buyer’s plan. Put the diligence, financing and draft delivery dates in the letter as lapse conditions.
The letter of intent is the cheapest document in your deal and the most expensive one to get wrong. Settle the money while you still have somewhere else to go.
Keep reading
The Seller’s LibraryWhat still binds you after the deal falls apartThe Buyer’s LibraryThe LOI decides who writes the purchase agreement.The Seller’s LibraryYour letter of intent says it is non-binding. Several of its paragraphs are not.
Have a lawyer read it before you sign.
A sale is decided in a handful of documents you sign exactly once — the letter of intent, the working capital definition, the indemnity. There is no rush. When you want those read properly, we are here.
Before founding Prencipe International, Joe practiced at the top law firms in the world, including Freshfields Bruckhaus Deringer, Baker McKenzie, Morgan Lewis & Bockius, and served at the U.S. Securities and Exchange Commission. He has spent his career on high-stakes disputes and transactions for businesses that cannot afford to lose. He represents owners selling the company they spent a career building -- reading the letter of intent before it is signed, and the purchase agreement while there is still room to change it.
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