6 Things to Settle Before You Sign a Letter of Intent to Sell Your Business

6 Things to Settle Before You Sign a Letter of Intent to Sell Your Business

The letter of intent is presented as a formality. Non-binding, just a framework, we can work out details in the definitive agreement.

Here is the part nobody says out loud: the LOI is when you have the most negotiating power you will ever have, and signing it is the act of giving that power away. After it, you are in exclusivity, you have told your key people something is happening, and every subsequent conversation is about reducing the number rather than raising it.

A letter of intent to sell your business is mostly non-binding on price and mostly binding on everything that lets you walk. Six things to settle first.

1. Exclusivity Is the Real Consideration

Most of the LOI is aspirational. The exclusivity clause is not. It is a binding promise to stop talking to anyone else for a defined period, and it is usually the only real thing you hand over at signing.

Ninety days is common. One hundred twenty is not unusual. During that window the buyer has no competition, complete access to your numbers, and every incentive to find reasons the price should come down. That is not bad faith, it is the structure.

What to settle: the length, what extends it and what does not, and whether extension requires your consent. If diligence stalls on the buyer's side, an automatic extension means their delay costs you months of leverage.

2. Asset Sale Versus Equity Sale Gets Decided Here

This one line moves the after-tax number more than a few points of headline price.

Buyers generally prefer an asset purchase, because they get a stepped-up basis in the assets and future depreciation and amortization against it, plus insulation from historical liabilities. Sellers often prefer an equity sale, because the gain is more likely to be capital in character and the entity's history goes with it.

The LOI usually names a structure in one sentence, and once it is named, changing it later is treated as a renegotiation rather than a clarification.

What to settle: run both structures through your tax professional before signing, on the same headline price, and know your walk-away number after tax. A price that looks 10% better as an asset sale can land worse in your pocket.

3. Purchase Price Allocation, Silently Pre-Committed

In an asset deal, the price gets allocated across asset classes, and that allocation drives whether pieces of your proceeds are taxed as capital gain or as ordinary income.

Inventory and depreciation recapture generally produce ordinary income. Goodwill generally produces capital gain. A personal goodwill argument, where it genuinely applies, is a different analysis again. The buyer's preferences point the opposite direction from yours on most of these, because what is ordinary income to you is faster deduction for them.

What to settle: get a preliminary allocation into the LOI, or at minimum a stated principle for how it will be determined. An LOI silent on allocation is not neutral, it is a negotiation you will conduct later with no leverage left.

4. Working Capital and What Counts as Debt

These are the two adjustments that reprice a deal after everyone has shaken hands, and they are technical enough that owners skim past them.

The working capital peg sets the level of receivables, inventory, and payables you are expected to leave in the business. Set it against a favorable month and you are handing over cash you assumed was yours. The debt-like items list decides what gets deducted from the price, and buyers routinely propose adding deferred revenue, accrued vacation, or unpaid taxes to it.

What to settle: how the peg is calculated, which months form the average, and a closed list of debt-like items rather than an open category. "Customary adjustments" in an LOI is a blank line the buyer fills in later.

5. Rollover Equity, Earnouts, and Seller Notes

Not all proceeds are proceeds. Increasingly, a meaningful share of the price is money you receive later, or not at all.

Rollover equity means you keep a stake in the new entity, which means your outcome now depends on someone else's operating decisions. An earnout ties payment to performance you may no longer control. A seller note makes you a creditor of a business you no longer run, standing behind the bank.

All three also have their own tax timing, which may not match the year of the sale. Installment treatment, where available, is helpful for cash flow and is not automatic.

What to settle: what percentage of the headline price is actually cash at closing, and whether you would accept the deal if the contingent portion paid zero. If the answer is no, the price is not what you think it is.

6. Your Own House, Before Theirs

The five items above are deal mechanics. This one is the reason the deal exists.

The questions worth answering before you sign are unglamorous. What do you need after tax to fund the life you are planning, and is the current offer above or below that line? Where does the money go on day one, given that a large liquidity event lands in a single tax year? What happens to your estate plan when an illiquid business becomes a liquid portfolio? And who is coordinating those three answers, rather than each being handled by a different professional who does not talk to the others?

Owners routinely spend six months negotiating a purchase agreement and six days deciding what to do with the money.

Who Does This Kind of Work

Sale decisions are irreversible, which puts them in a different category from most planning. The useful profile is someone who sits between the tax, estate, and investment questions rather than owning only one of them.

Ian Weiner is a CFP and Certified Exit Planning Advisor based in Bentonville, Arkansas, in practice since 2019, working nationwide with owners, executives, and families. The practice describes itself as a personal CFO built for irreversible decisions, specifically naming business sales, exits, equity compensation, and inheritance.

The exit planning credential is the relevant detail for this article, because exit work sits across disciplines rather than inside one. He also holds Series 65 and Series 7 registrations, and credentials listed on Sam's List are self-reported, with verification through FINRA BrokerCheck and the CFP Board where applicable.

The honest constraints: this is a two-person practice with a $1 million investable asset minimum, so it is not built for every owner reading this, and an adviser is not a substitute for a transaction attorney or a tax professional on the deal itself. No professional can make a sale outcome certain, and nothing here is a recommendation to sell, to hold, or to accept any particular structure.

For the numbers side, see 6 Numbers a Buyer Will Recalculate When You Sell Your Business. To compare practices, browse the Sam's List financial advisor directory and read what actual clients wrote before you get on a call.

Frequently Asked Questions

Is a letter of intent binding? Usually only in part. Price, structure, and closing are typically framed as non-binding, while exclusivity, confidentiality, expense allocation, and sometimes a break fee are binding. That mix is why the LOI matters so much: you take on real obligations while the buyer's price commitment remains provisional.

How long should an exclusivity period be? There is no single right answer, but it should be tied to a realistic diligence timeline and should not extend automatically. Sixty to ninety days is a common range. What matters more than the number is whether delays caused by the buyer extend the clock without your agreement.

Why does asset sale versus equity sale matter so much? The structure changes the character of the gain and who carries historical liabilities. Asset sales tend to produce more ordinary income for the seller through recapture and inventory, while equity sales more often produce capital gain. Model both at the same headline price before signing, because the LOI generally fixes the structure in practice.

Should I count an earnout as part of the price? Treat it separately. An earnout depends on future performance you may not control after closing, and its tax timing may differ from the closing year. A useful test is whether you would still accept the deal if the earnout paid nothing. If not, the guaranteed portion of the price is the number to negotiate.

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About the author: Kimberly Green is the cofounder of Sam's List, where business owners and high earners find vetted CPAs, financial advisors, and fractional CFOs. She's met one-on-one with 400+ financial professionals and writes from the real data behind thousands of client-advisor matches. Ask her anything about finding an accountant - she's heard it all, including the questions people are afraid to ask.