Letter of Intent Mergers and Acquisitions: Structure, Negotiation, and Sample (2026)

The letter of intent mergers and acquisitions practitioners send and receive every day is the single most consequential document in a private deal, because the price, structure, exclusivity, and working capital framework signed at LOI dictate roughly 71 percent of where the deal actually closes, according to the 2026 SRS Acquiom M&A Deal Terms Study. Most owners treat the LOI as a handshake. Sophisticated buyers treat it as the deal.

What This Actually Means

In mergers and acquisitions, a letter of intent (LOI) is a hybrid binding/non-binding document that bridges teaser-stage interest and the 90-plus-page definitive purchase agreement. The buyer uses it to lock in price, structure, and a 30 to 90 day no-shop period; the seller uses it as the trigger that opens full confirmatory due diligence and obligates the buyer to commit real money to lawyers, accountants, and a quality of earnings firm. Once signed, the LOI defines the gravity of every subsequent negotiation.

A properly drafted M&A letter of intent has two layers. The economic layer (purchase price, payment structure, conditions to closing, working capital target, escrow, indemnification framework) is explicitly non-binding pending due diligence and the definitive agreement. The procedural layer (exclusivity, confidentiality, expense responsibility, governing law, public announcements) is binding the moment both parties countersign. Courts in Delaware, Texas, and New York have repeatedly enforced the procedural layer even when deals fell apart on price, which is why the bindingness language in the LOI matters as much as the price.

The American Bar Association’s Model Asset Purchase Agreement framework describes the LOI as a preliminary written expression of agreement that must clearly mark which provisions are intended to be binding. Capstone Partners’ 2026 Lower Middle Market M&A Survey found that 15 to 30 percent of signed LOIs on private deals between 5 million and 50 million dollars see a price reduction during due diligence, with the bulk of those re-trades triggered by EBITDA quality issues surfaced in a quality of earnings report, customer concentration above 25 percent, undisclosed litigation, or working capital tracking below the agreed peg.

The 12 Sections Every M&A Letter of Intent Should Contain

1. Parties and Transaction Structure

The LOI must name the actual legal entities (not trade names) and specify whether the deal is an asset purchase or a stock purchase. Roughly 82 percent of private deals under 10 million dollars are structured as asset sales, per BizBuySell’s 2026 Q1 Insight Report, because buyers want a stepped-up depreciable basis and a clean break from inherited liabilities. Above 25 million dollars, stock sales become more common, especially when the target carries hard-to-transfer licenses, government contracts, or assignment-restricted customer contracts. The LOI must state which structure applies because the structure drives the tax bill, the third-party consent list, and the entire architecture of the definitive agreement.

Sellers should also push for clarity on the buyer’s capital source. A committed-capital private equity fund LOI is materially more reliable than a search fund or independent sponsor LOI, where the buyer still has to raise the equity. Ask for written proof of funds or a committed equity letter from the capital source before signing exclusivity.

2. Purchase Price and Payment Structure

A typical lower middle market LOI breaks the purchase price into four to five components: cash at close, seller note, rollover equity, earnout, and an escrow holdback. SRS Acquiom’s 2026 study reports that on private deals between 5 million and 50 million dollars, the average breakdown is 68 percent cash at close, 9 percent seller note, 8 percent rollover equity, 11 percent earnout, and 4 percent escrow. Sellers should push for cash at close to be as high as the buyer can stretch, because every dollar in seller note, rollover, or earnout carries collection or performance risk.

The LOI should also specify the EBITDA basis the buyer used to size the offer. Buyers commonly anchor to trailing twelve months (TTM) EBITDA, but sophisticated sellers force the LOI to specify TTM through a recent month-end and to identify which add-backs the buyer accepted. If the buyer signs the LOI at 5.0x of an EBITDA number that excludes 350,000 dollars of legitimate owner add-backs, the seller has already conceded 1.75 million dollars of enterprise value before due diligence starts.

3. Deposit and Good Faith Money

Deposits typically run 50,000 to 250,000 dollars on deals above 5 million dollars, held in third-party escrow and refundable to the buyer except in cases of buyer bad faith or material breach. The deposit signals seriousness and gives the seller measurable comfort during exclusivity. If a buyer refuses any deposit on a deal above 5 million dollars, that is a soft signal of weaker commitment. On deals above 25 million dollars, deposits of 250,000 to 500,000 dollars are increasingly standard, often coupled with a reverse break fee if the buyer walks for non-MAC reasons.

4. Exclusivity Period (the No-Shop)

This is the single most negotiated provision in any M&A letter of intent. Buyers want 90 days of exclusive negotiation to justify the 75,000 to 250,000 dollars they will spend on due diligence and legal work. Sellers should push for 30 to 60 days with a 15 to 30 day automatic extension only if both sides are making material progress. Anything beyond 75 days is excessive on a sub-25 million dollar deal. SRS Acquiom 2026 data shows 60 days is the median exclusivity period on private deals between 5 million and 25 million dollars; 90 days is the 75th percentile. Every additional week of exclusivity transfers bargaining power from seller to buyer, because the seller’s other options decay while the buyer’s diligence findings accumulate.

5. Confidentiality (Reaffirmed Beyond the NDA)

A mutual NDA should already be signed before the LOI stage. The LOI reaffirms confidentiality, typically extends the term for two to three years post-closing or post-termination, and binds both sides on the contents of the LOI itself. The confidentiality clause is binding from the moment the LOI is signed and survives termination of the deal. If the deal dies, the buyer cannot use what they learned during diligence (customer lists, vendor pricing, gross margins by segment) to compete against the seller. Sellers in tightly defined verticals should ask for a stand-alone non-use covenant tied to specific customer or vendor information.

6. Due Diligence Access and Process

The LOI defines the scope and pace of confirmatory due diligence. Standard practice covers three years of financials, federal and state tax returns, top customer concentration analysis, top 20 customers by revenue, key employee list, all material contracts, the facility lease, intellectual property registrations, pending or threatened litigation, environmental reports, and insurance policies. Smart sellers stage the diligence: top-level financials and aggregate customer data first, with customer names, employee identities, and sensitive IP held back until after a satisfactory diligence checkpoint at day 30. The LOI should specify the data room provider, who pays for it, and the process for buyer site visits and customer reference calls.

7. Conditions to Closing

This is where the LOI gets technical. Typical conditions include satisfactory completion of due diligence; third-party debt financing (if applicable); regulatory approvals (Hart-Scott-Rodino antitrust filing if the transaction exceeds 119.5 million dollars per the 2026 FTC threshold); key employee retention agreements; landlord consent for lease assignment; customer consent on any top accounts that contain change-of-control provisions; no material adverse change (MAC) in the business; and delivery of the working capital target. Each condition is a potential walk-away right for the buyer, so sellers should push to delete or tightly define every condition that is not strictly necessary.

8. Working Capital Adjustment Framework

This is the LOI provision that costs sellers the most money post-close, and most owners do not understand it until it has already hurt them. The working capital peg is the agreed normal level of net working capital (current assets minus current liabilities, excluding cash and debt) that must be delivered at close. If the seller delivers less than the peg, the purchase price is reduced dollar-for-dollar. If the seller delivers more, the buyer pays a true-up. The trap: buyers anchor the peg to a trailing twelve month average that includes seasonal highs and inflated receivables, while sellers want a structurally lower peg based on the actual cash conversion cycle. On a 10 million dollar deal, a 300,000 dollar variance in the peg is a 300,000 dollar swing in the seller’s check at close. Negotiate the dollar value of the peg in the LOI, not in the definitive agreement.

9. Binding vs. Non-Binding Sections

Every M&A letter of intent should contain an explicit statement of which provisions are binding and which are not. Binding (standard): exclusivity, confidentiality, expense responsibility, deposit terms, public announcements, governing law, and dispute resolution. Non-binding (standard): purchase price, payment structure, conditions to closing, representations and warranties framework, and timeline. If the LOI is silent on the binding/non-binding distinction, courts have occasionally interpreted the entire document as binding, which is catastrophic for both sides. The bindingness statement is usually the second or third paragraph of the LOI, immediately after the recital of parties.

10. Timeline and Key Dates

The LOI should list target dates for completion of due diligence (typically day 45), first draft of the definitive agreement (day 60), and expected signing and closing (day 75 to 120). These dates are aspirational unless they are tied to the exclusivity period. The practical effect: if exclusivity expires before signing, the seller can re-engage other buyers. Sellers should tie exclusivity duration to a realistic close timeline plus a small buffer, not to the buyer’s preferred 90-day window.

11. Expense Allocation

The default is each party bears its own expenses, including legal, accounting, and advisory fees. Buyers occasionally try to push diligence costs onto sellers if the deal terminates for any reason. Sellers should reject this entirely except in cases of seller fraud or willful breach. On larger deals, break fees flow in both directions: a buyer break fee of 250,000 to 500,000 dollars (1.5 million dollars or more on deals above 50 million dollars) is increasingly standard if the buyer walks for non-MAC reasons; a reverse break fee from seller to buyer is rare on private deals but appears in auctions with strategic bidders.

12. Representations, Warranties, and Governing Law

The LOI typically contains a placeholder for the representations and warranties package that will go into the definitive agreement (customary reps, 18-month survival for general reps, indefinite survival for fundamental reps on title, authority, taxes, and capitalization). The LOI may also flag whether the buyer intends to obtain representations and warranties insurance, which has become standard on deals above 20 million dollars. Governing law is typically Delaware for institutional buyers, the seller’s home state for closely held sellers, or whichever jurisdiction the parties’ counsel can agree on. Dispute resolution is increasingly arbitration (AAA or JAMS) rather than litigation, especially when both parties want to keep the dispute out of public record.

Binding vs. Non-Binding: The Distinction That Costs Sellers Millions

The most common mistake first-time sellers make is treating the entire LOI as non-binding because it says so on the cover page. The cover-page disclaimer is misleading: certain sections are binding, and they are binding immediately. Understanding which is which is the single highest-impact piece of M&A literacy a seller can develop.

The takeaway: sellers should focus their negotiation energy on the binding provisions (exclusivity length, deposit size, expense caps) and on locking down the working capital peg in dollar terms before signing. Once the LOI is signed, the buyer holds the upper hand on every non-binding term because the seller is off the market for the duration of exclusivity.

The Re-Trade Problem: Why 15 to 30 Percent of LOI Prices Get Cut

A re-trade is when the buyer, having signed the LOI and completed confirmatory due diligence, comes back to the seller with a lower price than the LOI specified. Capstone Partners’ 2026 Lower Middle Market M&A Survey reports that 15 to 30 percent of signed LOIs on private deals between 5 million and 50 million dollars see a price reduction between LOI and closing, with the median re-trade cutting price by 8 to 12 percent. On a 10 million dollar LOI, that is 800,000 to 1.2 million dollars of value evaporating after exclusivity has already locked the seller out of the market.

The most common re-trade triggers, in rough order of frequency:

• EBITDA quality issues from QoE. The quality of earnings report identifies one-time revenue, undisclosed cost run-rate changes, owner add-backs the QoE firm rejects, or accounting treatment changes that reduce adjusted EBITDA. If reported EBITDA was 2 million dollars and QoE settles at 1.75 million dollars, the buyer cuts price by 1.25 million dollars at a 5.0x multiple.
• Customer concentration above 25 percent. Buyers underwrite to a customer concentration assumption from the CIM. If diligence reveals the top customer is 35 percent of revenue, or the top three are 60 percent, buyers either re-trade the price by 10 to 20 percent or restructure proceeds into a longer earnout.
• Undisclosed litigation or regulatory issues. Anything that surfaces in legal diligence (open lawsuits, OSHA findings, EPA violations, labor disputes) almost always triggers a price cut or an indemnity carve-out that effectively functions as a price cut.
• Working capital tracking below the peg. If the trailing-three-month working capital trend is running 200,000 dollars below the LOI peg, the buyer will reset the peg or cut price. This is preventable: sellers should manage working capital tightly through diligence.
• Key employee resignation or instability. If a key employee resigns during exclusivity, or buyer reference calls reveal that the GM is unhappy, buyers either restructure the earnout or cut price.
• Trailing-three-month revenue decline. Any revenue softness during diligence gives the buyer an opening. Buyers underwrite the LTM number; they negotiate against the most recent trend.

The defense against re-trade is preparation. A seller-side quality of earnings report commissioned before going to market (cost: 35,000 to 75,000 dollars) eliminates the most common re-trade trigger because the buyer cannot surface surprises that have already been documented and adjusted in the seller’s own QoE. CT Acquisitions advises every seller above 3 million dollars of EBITDA to commission a seller-side QoE before signing any LOI.

Sample M&A Letter of Intent (Full 14-Section Structure)

Below is a complete sample LOI for a hypothetical transaction: Northbridge Industrial Partners LLC acquiring Coastal Mechanical Services Inc., a Florida HVAC contractor, for 12.5 million dollars. The structure: 9 million dollars cash at close, 2 million dollars rollover equity, 1 million dollars seller note, and 500,000 dollars earnout. This is a typical lower middle market structure for an HVAC business with 2.5 million dollars of adjusted EBITDA selling at 5.0x.

NORTHBRIDGE INDUSTRIAL PARTNERS LLC
500 Boylston Street, 17th Floor
Boston, MA 02116

June 4, 2026

Mr. Daniel Ortiz
Chief Executive Officer and Majority Shareholder
Coastal Mechanical Services Inc.
2200 Industrial Parkway
Jacksonville, FL 32256

Re: Letter of Intent to Acquire Coastal Mechanical Services Inc.

Dear Mr. Ortiz:

This letter of intent (this "LOI") sets forth the principal terms and
conditions on which Northbridge Industrial Partners LLC, a Delaware
limited liability company (or its designated affiliate, "Buyer"),
proposes to acquire substantially all of the operating assets of
Coastal Mechanical Services Inc., a Florida corporation
("Seller" or the "Company").

Except for the provisions of Sections 9, 10, 11, 12, 13, and 14 below,
which are intended to be binding on the parties, this LOI is
non-binding and is merely a statement of the parties' present intent
to negotiate a definitive agreement on the terms set forth herein.

1. PARTIES AND STRUCTURE
   Buyer: Northbridge Industrial Partners LLC, a Delaware LLC, or
   a newly formed acquisition subsidiary thereof ("NewCo").
   Seller: Coastal Mechanical Services Inc., a Florida corporation.
   Structure: Asset purchase. NewCo will acquire substantially all
   operating assets of the Company and assume only those liabilities
   specifically identified in the Definitive Agreement (the
   "Assumed Liabilities"). Excluded liabilities include all
   pre-closing tax liabilities, all pre-closing litigation, and any
   employee obligations accrued prior to closing.

2. PURCHASE PRICE
   Total enterprise value: $12,500,000, payable as follows:
   (a) Cash at Close:       $9,000,000
   (b) Rollover Equity:     $2,000,000 (16.0% of NewCo at close)
   (c) Seller Note:         $1,000,000, 5-year term, 7.0% interest,
                            quarterly interest-only payments,
                            principal due at maturity, subordinated
                            to senior debt.
   (d) Earnout:             $500,000 over 2 years, paid in two equal
                            installments of $250,000 if NewCo
                            achieves trailing-12-month adjusted
                            EBITDA of at least $2,750,000 at each
                            measurement date (December 31, 2026 and
                            December 31, 2027).

   Purchase price is calculated on a cash-free, debt-free basis,
   with normalized working capital delivered at closing as
   described in Section 3.

3. WORKING CAPITAL ADJUSTMENT
   The Purchase Price assumes delivery of Net Working Capital
   ("NWC") at closing equal to $725,000 (the "NWC Target"),
   calculated as the trailing 12-month average of current assets
   (excluding cash and including a 30-day customer deposit accrual)
   minus current liabilities (excluding debt, deferred revenue, and
   accrued income taxes), based on the Company's books and records
   prepared in accordance with GAAP applied on a basis consistent
   with historical practice. The Purchase Price will be adjusted
   dollar-for-dollar for any variance from the NWC Target outside
   of a $35,000 collar. Final NWC will be determined within 75 days
   post-closing by Buyer's accountants, subject to Seller's right
   to dispute and submit unresolved items to a Neutral Accountant.

4. DEPOSIT
   Within 5 business days of execution of this LOI, Buyer shall
   deposit $200,000 into an escrow account with a mutually agreed
   escrow agent (the "Deposit"). The Deposit shall be refundable
   to Buyer upon termination of this LOI for any reason, except
   in the event of Buyer's material breach of the binding
   provisions of this LOI (specifically Sections 9, 11, or 12),
   in which case the Deposit shall be released to Seller as
   liquidated damages.

5. DUE DILIGENCE
   Seller shall provide Buyer and its representatives reasonable
   access during normal business hours to the Company's books,
   records, contracts, facilities, key employees, and customers
   (subject to mutually agreed customer-contact protocol). Buyer
   shall use commercially reasonable efforts to complete its
   confirmatory due diligence within 45 days of execution of this
   LOI. Diligence will include a third-party quality of earnings
   report, legal diligence, environmental Phase I review,
   employment matters review, and customer reference calls
   (limited to top 10 customers with prior Seller consent).

6. CONDITIONS TO CLOSING
   The Definitive Agreement and closing shall be subject to:
   (a) Satisfactory completion of Buyer's confirmatory due
       diligence in Buyer's reasonable judgment;
   (b) Negotiation and execution of a mutually acceptable Asset
       Purchase Agreement and ancillary documents;
   (c) Receipt of all required third-party consents, including
       landlord consent for assignment of the Jacksonville facility
       lease and customer consent on the two top-10 customer
       contracts containing change-of-control provisions;
   (d) Execution of three-year employment agreements with the four
       key employees identified on Schedule A;
   (e) Execution of a five-year non-competition and non-solicitation
       agreement by Daniel Ortiz covering a 75-mile radius from
       Jacksonville, FL;
   (f) No material adverse change in the business, operations,
       financial condition, or prospects of the Company since
       March 31, 2026;
   (g) Delivery of the Net Working Capital Target;
   (h) Receipt of all required regulatory approvals;
   (i) Buyer's procurement of debt financing on terms substantially
       consistent with the term sheet attached as Exhibit A.

7. REPRESENTATIONS AND WARRANTIES
   The Definitive Agreement shall contain customary representations
   and warranties by Seller, subject to disclosure schedules,
   covering organization and authority, title to assets, financial
   statements, taxes, employee and benefit matters, litigation,
   environmental, customer and supplier relationships, intellectual
   property, material contracts, real property, insurance, and
   compliance with laws. General reps and warranties shall survive
   closing for 18 months. Fundamental reps (organization, authority,
   title to assets, taxes, capitalization) shall survive until the
   applicable statute of limitations. Buyer intends to obtain a
   representations and warranties insurance policy with a $125,000
   retention; premium to be split 50/50 between Buyer and Seller.

8. ESCROW AND INDEMNIFICATION
   At closing, $625,000 (5.0% of Purchase Price) shall be held in
   escrow for 18 months to secure Seller's indemnification
   obligations under the Definitive Agreement, with a $75,000
   deductible and a cap equal to the escrow amount for general
   reps. Fundamental reps and fraud shall be subject to a cap
   equal to the full Purchase Price.

9. EXCLUSIVITY [BINDING]
   For a period of 60 days from the date of this LOI (the
   "Exclusivity Period"), Seller and its representatives shall not,
   directly or indirectly, solicit, initiate, encourage, accept,
   or engage in any discussions, negotiations, or transactions with
   any third party regarding the sale of the Company, the sale of
   any material portion of the Company's assets, or any
   recapitalization, equity issuance, or other change-of-control
   transaction. The Exclusivity Period may be extended by an
   additional 15 days upon mutual written agreement of the parties
   if both parties are making good-faith progress toward signing
   a Definitive Agreement.

10. CONFIDENTIALITY [BINDING]
    The mutual confidentiality agreement dated April 22, 2026
    between Buyer and Seller is hereby reaffirmed and shall
    continue in full force and effect. The terms of this LOI and
    the negotiations contemplated hereby shall be kept confidential
    by both parties, except as required by law or as necessary to
    obtain financing, legal, accounting, or other professional
    advice.

11. EXPENSES [BINDING]
    Each party shall bear its own expenses (including legal,
    accounting, advisory, and diligence fees) in connection with
    the proposed transaction, regardless of whether the transaction
    is consummated, except as expressly set forth in Section 4
    (Deposit) above.

12. PUBLIC ANNOUNCEMENTS [BINDING]
    Neither party shall make any public announcement regarding this
    LOI or the proposed transaction without the prior written
    consent of the other party, except as required by law or stock
    exchange rule. Both parties acknowledge that premature
    disclosure could materially harm the Company's customer,
    employee, and supplier relationships.

13. GOVERNING LAW AND DISPUTE RESOLUTION [BINDING]
    This LOI shall be governed by the laws of the State of Delaware,
    without regard to its conflict of laws principles. Any dispute
    arising under this LOI shall be resolved by binding arbitration
    administered by JAMS in Wilmington, Delaware, before a single
    arbitrator with at least 10 years of experience in M&A
    transactions.

14. TERMINATION [BINDING with respect to Sections 9, 10, 11, 12, 13]
    This LOI shall terminate upon the earliest of:
    (a) execution of the Definitive Agreement;
    (b) expiration of the Exclusivity Period without execution of
        the Definitive Agreement;
    (c) mutual written agreement of the parties to terminate; or
    (d) written notice by either party of termination for any
        reason. Sections 9, 10, 11, 12, and 13 shall survive
        termination of this LOI for a period of two years.

If the foregoing accurately reflects our mutual understanding,
please countersign below.

Sincerely,

NORTHBRIDGE INDUSTRIAL PARTNERS LLC

By: _______________________________
Name: Margaret Holloway
Title: Managing Partner

ACCEPTED AND AGREED:

COASTAL MECHANICAL SERVICES INC.

By: _______________________________
Name: Daniel Ortiz
Title: Chief Executive Officer

Date: ____________________________

This sample is illustrative and not legal advice. Every M&A letter of intent must be reviewed by qualified M&A counsel before signing. The numbers above reflect a typical structure for a 2.5 million dollar EBITDA HVAC contractor at 5.0x. For more on how HVAC contractors are valued at exit, see the HVAC exit preparation guide.

What Sellers Should Negotiate Before Signing

First-time sellers typically sign the LOI roughly as presented because they are emotionally invested in getting the deal done and afraid to push back. That is exactly the wrong instinct. The buyer has more flexibility at LOI than at any later point because they have not yet spent the 75,000 to 250,000 dollars on diligence, legal, and accounting work that locks them into the deal. Here are the seven items every M&A seller should push back on before signing.

Shorter Exclusivity (30 to 45 Days, Not 90)

Push for 30 to 45 days with a 15 to 30 day automatic extension only if both sides are progressing in good faith. Avoid 90 days on any sub-25 million dollar deal. The longer the no-shop, the more bargaining power the buyer accumulates. The 2026 SRS Acquiom data shows the median sub-25 million dollar deal closes 74 days from signed LOI, but the diligence and definitive agreement work compresses to 50 to 60 days with a motivated buyer.

Capped Expense Reimbursement

If the buyer asks for expense reimbursement in any termination scenario, cap it hard (typically 100,000 dollars or less) and limit it to specific buyer-favorable triggers (seller breach, seller withdrawal without cause). Reject open-ended diligence-cost reimbursement language. On larger deals, expense caps are sometimes replaced by reverse break fees; the same principle applies (cap them tightly and tie them to specific triggers).

Working Capital Peg Defined in Dollars Up Front

This is the single most valuable negotiation point in the LOI. Insist on a specific dollar amount for the NWC peg in the LOI itself, not a vague trailing twelve month average formula. If the peg is left to the definitive agreement, the buyer’s accountants will set it using methodology that benefits the buyer, and the seller will discover the trap at closing when the check shrinks by 200,000 to 500,000 dollars. Standard fights: should the peg include or exclude deferred revenue? Should it use a 6-month, 9-month, or 12-month average? Should seasonal businesses use peak-month or average-month calculations? Win these fights in the LOI.

Lower Deposit (and No Reverse Deposit From Seller)

Buyer deposits to seller (refundable) are good. Reverse deposits from seller to buyer are rare and should be refused outright. If a buyer deposit is offered, 100,000 to 250,000 dollars is standard for sub-25 million dollar deals. Anything above 500,000 dollars is unusual at that deal size.

No Specific Performance Clauses

Specific performance allows the buyer to compel the seller to close even if the seller wants to back out. This is rare in private deals but creeps into LOIs from sophisticated private equity buyers. Strike it. Liquidated damages capped at the deposit amount are sufficient.

Drop or Tightly Define the Financing Contingency

If the buyer is a committed-capital fund, there should be no financing contingency. If the buyer is a search fund or independent sponsor, a financing contingency may be required but should be tightly defined (specific lender, specific terms, specific commitment dates, with a drop-dead date). An open-ended financing contingency lets the buyer walk if the SBA loan does not close, which is a real risk on deals below 5 million dollars where SBA 7(a) financing is the typical path.

Narrow MAC Definition

Buyers want the material adverse change clause broad (“any change that materially and adversely affects the business”). Sellers want it narrow (“any change that materially and adversely affects the business, excluding changes resulting from general economic conditions, industry-wide changes, changes in law, acts of war or terrorism, pandemics, and other forces majeures”). The MAC carve-out list is one of the most negotiated provisions in modern M&A and should be addressed at LOI rather than left to the definitive agreement.

Buyer-Side Negotiation Priorities

For symmetry, here is what sophisticated buyers push for in an M&A letter of intent. Sellers who understand the buyer playbook negotiate more effectively.

Longer Exclusivity (90 Days or More)

Buyers want enough time to complete a full QoE, legal diligence, environmental Phase I, customer reference calls, and definitive agreement negotiation without competitive pressure. 90 days is the buyer’s preferred default; sophisticated buyers ask for 120 days on deals above 25 million dollars.

Strong Working Capital Language (LTM Average With Buyer-Favorable Adjustments)

Buyers want the peg calculated as a 12-month average that includes seasonal highs and conservative receivable assumptions. They also push for the right to challenge specific working capital items (uncollectible receivables, obsolete inventory, accrued vacation) at closing.

Broad MAC Carve-Outs Favoring the Buyer

Buyers want MAC defined broadly enough that any material customer loss, key employee departure, regulatory adverse action, or revenue trend reversal during diligence gives them a walk-away right.

Right to Walk on Adverse Findings

Conditions to closing typically include satisfactory completion of due diligence in the buyer’s reasonable judgment. Sellers should push back on the breadth of this language; buyers will resist.

Cap on Seller Advisor and Transaction Expenses

Buyers want the seller’s investment banker fees, M&A advisor fees, and transaction bonuses to be paid out of the purchase price as transaction expenses, not added on top. The LOI should specify this allocation explicitly.

Typical M&A Deal Timeline (LOI to Close)

1. Day minus-60 to Day minus-30: Indications of Interest (IOIs). After initial buyer outreach, management meetings, and CIM distribution, qualified buyers submit non-binding IOIs with valuation ranges, structure preferences, and capital sources. Sellers select two to four buyers for the next round.
2. Day minus-30 to Day 0: Preliminary Diligence and LOI Drafts. Selected buyers conduct preliminary diligence (data room access, management calls) and submit draft LOIs with firm price, structure, and key terms. Seller’s M&A advisor and attorney negotiate redlines across multiple rounds.
3. Day 0: Signed LOI. Both parties countersign. Exclusivity clock starts. Deposit funded within 5 business days.
4. Day 0 to Day 45: Confirmatory Due Diligence. Full data room access. Quality of earnings analysis (typical cost: 50,000 to 150,000 dollars). Legal diligence. Customer reference calls. Employee interviews. Environmental Phase I if required. Insurance and benefits review. Tax diligence.
5. Day 30 to Day 75: Definitive Agreement Drafting. Buyer’s counsel drafts the Asset Purchase Agreement or Stock Purchase Agreement. Seller’s counsel redlines. Disclosure schedules prepared by seller’s accountant and attorney. Side documents (escrow agreement, employment agreements, non-compete, transition services agreement) drafted in parallel.
6. Day 60 to Day 90: Re-Trade Window (if any). If diligence surfaces material issues, buyer requests a price adjustment or structural change. Negotiation of any reduction. This is when 15 to 30 percent of LOIs see a price cut per Capstone 2026.
7. Day 75 to Day 120: Signing and Closing. Definitive agreement signed. Closing conditions satisfied (lease assignment, employment agreements signed, escrow funded, R&W insurance bound, working capital estimate delivered). Wire transfer at closing.
8. Day 120 to Day 195: Post-Closing. Working capital true-up calculated within 60 to 90 days post-close. Indemnification claims (if any) made during survival period. Earnout measurement at month 12 and month 24. Escrow release at month 18.

Total timeline from signed LOI to close is 75 to 120 days for a well-run sub-25 million dollar deal. Larger or more complex deals (HSR filing, multi-state regulatory approval, environmental remediation, multiple closings) can take 180 days or more. For a fuller look at process timing, see the guide on how long it takes to sell a business.

Break Fees in M&A Letters of Intent

On private deals below 25 million dollars, break fees are uncommon; the deposit serves as the primary financial penalty for buyer breach. On deals above 25 million dollars, break fees become standard. Typical sizing:

• Buyer break fee (buyer walks for non-MAC reason): 250,000 to 500,000 dollars on deals between 25 million and 50 million dollars. 1 million dollars or more on deals above 50 million dollars. On strategic deals or auctions, reverse break fees of 3 to 5 percent of enterprise value appear.
• Seller break fee (seller accepts superior proposal during exclusivity): Rare on private deals; standard in public deals at 2 to 4 percent of enterprise value. When private sellers do agree to break fees, they typically cap them at the buyer’s documented out-of-pocket diligence expenses (50,000 to 200,000 dollars).
• Reverse termination fee (financing failure): 4 to 7 percent of enterprise value on deals above 100 million dollars when the buyer depends on third-party debt financing. Rare below 50 million dollars.

Break fees are binding from the moment the LOI is signed. They are one of the most economically significant binding provisions, and they belong in the negotiation calculus alongside exclusivity length and deposit size.

Common Mistakes in M&A Letters of Intent

Signing Before Reading the Binding Clauses

The price is non-binding, so sellers focus on the price. But the exclusivity, confidentiality, expense, and governing law clauses are binding the second the LOI is countersigned. Read those four sections carefully and have qualified M&A counsel review them before signing anything.

Accepting the First Working Capital Definition

Buyers offer a working capital definition that is technically correct but economically favorable to the buyer. Calculate what the peg means in dollars at the actual peg date using the seller’s own books. If the peg is 50,000 dollars above typical operating NWC, the seller will owe 50,000 dollars at closing. Negotiate the dollar value before signing.

Ignoring the Earnout Math

Earnouts look like deferred consideration but rarely pay in full. CapTarget’s 2026 M&A Earnout Survey reports only 47 percent of earnouts pay out at 90 percent or more of the maximum, and 19 percent pay zero. If the LOI structures 1 million dollars as an earnout with EBITDA targets the business has never hit, value it at 50 cents on the dollar and negotiate more cash up front.

Not Verifying the Buyer’s Capital

Ask for written proof of funds, a committed equity letter from the capital source, or a debt financing commitment letter before signing exclusivity. A search fund LOI is worth materially less than a committed-capital PE fund LOI. Sellers have granted 90 days of exclusivity to unfunded buyers who could not raise the equity, killing the deal at day 85 and burning a quarter of the year.

Underestimating the Cost of a Failed Deal

If the deal dies at day 70 of exclusivity, the seller has lost three months of the market, the senior team knows the company tried to sell, customers may have heard rumors, and the seller has likely paid 40,000 to 150,000 dollars in attorney, accountant, and advisor fees. The cost of a failed LOI is real and concentrated. Choose the buyer carefully and verify the capital.

Failing to Run a Pre-Market Seller QoE

A seller-side quality of earnings report commissioned before going to market eliminates the most common re-trade trigger because the buyer cannot surface surprises that have already been adjusted in the seller’s own QoE. The 35,000 to 75,000 dollar cost typically returns 5 to 15 times that amount in defended enterprise value.

Frequently Asked Questions

Is a letter of intent in mergers and acquisitions legally binding?

Most M&A letters of intent are mixed documents. The major economic terms (price, structure, conditions to closing) are non-binding pending due diligence and the definitive agreement, while specific procedural sections (exclusivity, confidentiality, expense responsibility, governing law, deposit terms, public announcements) are binding the moment both parties countersign. Always confirm in writing which sections are binding and which are not. Courts in Delaware and other states have occasionally enforced LOIs that did not clearly state which sections were binding, so the bindingness language is one of the most important provisions in the document.

How long should the exclusivity period in an M&A LOI last?

SRS Acquiom’s 2026 M&A Deal Terms Study shows the median exclusivity period on private deals between 5 million and 25 million dollars is 60 days, with 75th-percentile deals at 90 days. Sellers should push for 30 to 45 days with a 15 to 30 day automatic extension only if both parties are making good-faith progress. Exclusivity periods longer than 75 days favor the buyer and reduce seller bargaining power because the seller’s other market options decay while the buyer accumulates diligence findings.

What is the difference between an IOI and an LOI in M&A?

An Indication of Interest (IOI) is an earlier, lighter document that gives a valuation range and signals serious buyer interest. It typically has no binding sections, no exclusivity, and no specific terms beyond price range and structure preference. A letter of intent is materially more detailed: it locks in a specific price, sets exclusivity, includes a deposit, and binds both parties on confidentiality and expenses. Most well-run sale processes progress from three to five IOIs down to one signed LOI from the buyer who offers the best combination of price, structure, and execution certainty.

What is a re-trade and how common is it after the LOI is signed?

A re-trade is when the buyer, having signed the LOI and completed confirmatory due diligence, comes back to the seller with a lower price than the LOI specified. Capstone Partners’ 2026 Lower Middle Market M&A Survey reports 15 to 30 percent of signed LOIs see a price reduction during diligence, with the median re-trade cutting price by 8 to 12 percent. The most common triggers are EBITDA quality issues from the QoE, customer concentration above 25 percent, undisclosed litigation, and trailing-three-month revenue softness. A seller-side QoE commissioned before going to market is the most effective defense.

How large is a typical deposit in an M&A letter of intent?

On private deals above 5 million dollars, buyer deposits typically run 50,000 to 250,000 dollars, held in third-party escrow and refundable to the buyer except in cases of buyer bad faith or material breach. On deals above 25 million dollars, deposits of 250,000 to 500,000 dollars are standard, sometimes coupled with a reverse break fee. Deposits below 5 million dollars are less common because the deal economics rarely justify the escrow setup; sellers in that size range often rely on exclusivity terms and buyer reputation rather than a posted deposit.

Can a seller back out of a signed M&A letter of intent?

On the non-binding terms (price, structure, closing conditions, working capital adjustment), the seller can walk away during the diligence window. But the binding sections (exclusivity, confidentiality, expense responsibility, deposit terms, governing law) survive any termination of the deal. If the seller withdraws during exclusivity and starts shopping the deal to another buyer, the original buyer can sue for breach of the exclusivity covenant and seek damages or release of the deposit. Sellers should never sign an LOI they are not prepared to honor through the diligence window.

What to Do Next

If a buyer just sent an M&A letter of intent, the worst thing to do is sign it the same day. Take 48 to 72 hours. Get M&A counsel to review the binding sections. Get an M&A advisor to model the economics of the price, structure, and working capital peg. A few thousand dollars in review fees prevents the 200,000 to 500,000 dollar mistakes that come from buyer-friendly drafting.

If the process is earlier (researching what an LOI looks like before going to market or before responding to an unsolicited inquiry), study the sample LOI above carefully. Note the binding clauses, the working capital language, the deposit terms, and the earnout structure. Then talk to two or three M&A advisors before picking one. The advisor selection shapes how every future LOI in the process will look.

Related guides: How to Negotiate an Earnout in a Business Sale | M&A Safety and Due Diligence | Speak with a CT Acquisitions Advisor