The letter of intent: what to negotiate before signing

A letter of intent is the document in which the buyer lays out their offer: the price, but above all the structure, exclusivity, holdbacks, non-compete and your transition. Most of it is non-binding, yet it sets the frame for everything that follows. Whatever you don't negotiate before signing becomes very hard to fix afterwards.

Why it all happens before you sign

As long as you haven't signed anything, you have one thing the buyer doesn't: choice. You can talk to other buyers, compare offers and say no. That's the payoff of a well-run competitive sale process.

The moment you sign a letter with an exclusivity clause, that balance flips. You can no longer talk to anyone else. The buyer opens your data room, starts due diligence and, if they find a problem, comes back asking for a lower price. You're alone at the table.

That's why a letter of intent should be negotiated as if it were final, even though legally it isn't.

The seven points to negotiate

1. The price, and above all its structure

A $5 million price paid in cash at closing has nothing in common with a $5.5 million price where part depends on future results. Ask that the letter state clearly:

• the amount paid at closing;
• the amount you lend, the vendor financing, with its rate and term;
• the contingent amount, the earn-out, with how it's measured and for how long.

Compare offers on what you actually receive, and when. Not on the number at the top of the page.

2. How long exclusivity lasts

Long exclusivity lets the buyer take their time while other interested parties move on. Prefer a short period that can be extended only if the buyer hits specific milestones: financing confirmed, due diligence completed, draft agreement delivered.

3. The working capital target

The price assumes the business is handed over with a "normal" level of receivables, inventory and payables. If the target is set above your real average, you'll have to leave cash in the business at closing. Ask for the calculation method to be written into the letter, based on an average over several months, and have your accountant check it.

4. The holdback in escrow

The buyer will often want to keep part of the price for a while, in escrow with a lawyer or notary, to cover problems discovered after the sale. Negotiate three things: the amount, the duration and the specific grounds for drawing on it. The more complete your file, the less reason that holdback has to be large. A solid Transition Document is your best argument.

5. The non-compete

The buyer doesn't want you opening up across the street, and that's fair. But a clause that's too broad can be challenged, or tie your hands for no reason: it has to be reasonable in length, territory and the activities it covers. Have your lawyer validate it, especially if you have other plans in the same industry.

6. Your transition period

How long do you stay? In what role, at what pay, and how many hours a week? A vague transition often turns into two years full-time. If your business already runs without you, you can argue for a transition of a few months, framed by a first-100-days plan.

7. Closing conditions

Buyer financing, bank approval, consent from clients or the landlord, retention of key employees: every condition is an exit door for the buyer. Ask for the full list in the letter, and refuse vague conditions like "to the buyer's satisfaction in its sole discretion."

Two letters in the same week

A made-up case, but a typical one. A 61-year-old founder of an office furniture manufacturer in Saint-Augustin-de-Desmaures, near Quebec City ($9 million in sales, 40 employees), receives two letters of intent a few days apart.

	Buyer A	Buyer B
Headline price	$4.8M	$5.2M
Cash at closing	$4.8M, of which $720,000 (15%) held back for two years	$3.9M
Vendor financing	none	$800,000 over five years
Earn-out	none	$500,000 tied to first-year gross margin
Working capital target	the busiest month of the year	12-month average
Exclusivity	60 days	45 days
Transition	"to be determined"	six months, three days a week

On paper, A pays $4.8 million cash. In reality, she gets $4.08 million at closing, and the rest depends on whatever claims come up over two years. Her sales peak in February and March, when her public-sector clients spend their budgets before year-end: a working capital target based on the busiest month would have forced her to leave hundreds of thousands of dollars more than her average in the business. B isn't risk-free either: $1.3 million depends on how the business does after she leaves.

Before signing anything, she went back to B with her advisors and asked for a capped holdback, a hypothec on the shares to secure the vendor note, and gross margin calculated with the same accounting methods as before the sale. B agreed to most of it, because A was still in the picture. The numbers are fictional. The lesson isn't: you compare structures and timing, not headline prices.

The checklist before you sign

Before signing a letter of intent, you should be able to answer each of these questions:

1. How much do I receive at closing, in cash, after the holdback?
2. How much do I lend, at what rate, over what term, and with what security?
3. How much is contingent, on what measure, and who controls that measure?
4. How many days of exclusivity, and under what conditions can it be extended?
5. How is the working capital target calculated?
6. What are all the closing conditions?
7. How long do I stay, and in what role?
8. Have my lawyer, my tax advisor and, for a share sale, the registered dealer read the document?

If any answer is "we'll see later," that's a point to negotiate now.

This week, before any offer arrives

• Ask your accountant for your working capital month by month over 24 months. You'll know what target is reasonable, and you'll spot an inflated one in a minute.
• Write your three limits on one page: the minimum cash you need at closing, the longest transition you'll accept, and the largest share of the price you're willing to lend or leave contingent.
• Pick the person who will read the letter now: a lawyer or notary who does business transactions every year. When the offer lands, you won't have time to shop around.

None of this guarantees the price or the sale. But this is the exact moment when your business's independence turns into money: a smaller holdback, less earn-out, a shorter transition. For the rest of the path, see step 8: sell at the right price.

Do it with a pro

On your own, you might read two or three letters of intent in your life, across from buyers who sign several a year. With us and our regional partner, every offer is compared on what you actually receive, and the letter is negotiated with your lawyers and tax advisors before exclusivity ties your hands. See how it works.

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