If you get a buyer excited, it’s tempting to jump straight to ‘let’s do the deal’. That’s how founders end up wasting 90 days, leaking leverage and still not knowing what they’ve actually agreed.
A solid LOI tightens the conversation early, sets a timetable and surfaces the real negotiation points before you burn fees. If you want the wider context on deal flow and exits, cross-reference Mergers & Acquisitions (M&A): The Complete SME Buy & Exit Playbook.
In this article, we’re going to discuss how to:
- Use an LOI to lock scope, price logic and timing without boxing yourself in
- Spot the clauses that quietly shift risk, cost and control
- Negotiate exclusivity, diligence and breakpoints so you don’t lose months
Letter Of Intent: A Practical Definition For Operators
A letter of intent is a short document that captures the commercial deal you’re trying to do, the process to get there and which bits are legally binding. It’s not the final contract, it’s the map that stops everyone driving in different directions.
Think outcomes, not paperwork. A good LOI should let you answer, in under 60 seconds:
- What is being bought or sold: Shares, assets, a carve-out, a bolt-on
- How the price is set: Enterprise value, cash free debt free, working capital peg
- When it completes: A dated timeline with dependencies
- What happens if it doesn’t: Costs, exclusivity end date, walk-away rights
Sense-check: if you can’t show the LOI to your finance lead and get a clear ‘Yes, I know what we’re building towards’ response, it’s too vague.
When You Actually Need A Letter Of Intent
Not every chat needs an LOI. But if there’s real money, real diligence and real time involved, you want it.
You need a letter of intent when at least two of these are true:
- The buyer wants exclusivity, access to staff, or customer calls
- You’ll spend £5k to £50k on advisers in the next 30 days
- There’s complexity: earn-out, deferred consideration, vendor loan, carve-out, property
- You’re managing more than one interested party and need process discipline
If the buyer refuses to put anything in writing but asks for full data room access, that’s usually a sign they’re either inexperienced or fishing. Either way, tighten the process.
What To Gather In A Few Hours Before You Draft Or Sign
You can’t negotiate well without fast facts. Start internal, then layer in public signals so you’re not negotiating in a vacuum.
Internal Data You Can Pull Today
Block out two hours with your finance lead and ops lead. Pull:
- Trailing 12 months P&L: Revenue by product line, gross margin, overhead, EBITDA
- Customer concentration: Top 10 customers as % of revenue, renewal dates, churn
- Cash and debt snapshot: Bank balance, loans, overdrafts, HP, outstanding VAT/PAYE
- Working capital: Debtors days, creditors days, inventory turns, seasonality spikes
- One-page risk list: Key person dependencies, supplier single points of failure, ongoing disputes
Completion check: you should be able to produce a one-page ‘deal facts’ sheet that matches your accounts and management reporting, without heroic adjustments.
Public And Market Signals In Under An Hour
You’re not trying to build a perfect valuation model in an hour, you’re trying to stop obvious mistakes.
- Comparable deals: Look for 3 to 5 transactions in your sector and size band, note headline multiples and whether they include earn-outs
- Buyer credibility: Companies House filings, press releases, recent fundraises, insolvency risk markers
- Hiring and expansion signals: Job postings, new sites, new regions, changes in leadership
This helps you set a realistic range and decide whether to push for speed or protect optionality.
The Clauses That Matter Most In A Letter Of Intent
Most LOIs look similar. The difference between a founder-friendly LOI and a painful one is usually 6 to 10 lines that people skim.
Price, Structure And The ‘What Exactly Is The Number?’ Problem
Price in an LOI is often framed as ‘£X on a cash free, debt free basis’. That’s fine, but only if you define what counts as debt and how you treat working capital.
Insist on clarity on:
- Enterprise value vs equity value: Don’t let these get muddled
- Debt-like items: Director loans, deferred revenue, corporation tax liabilities, lease obligations
- Working capital mechanism: A peg based on average last 12 months or a specific month, and how seasonality is handled
Quick calc to stress-test: if your average working capital is £300k and the buyer proposes a £200k peg, you’re effectively handing over £100k of value on day one.
Earn-Outs: The Clause That Turns A Good Deal Into A Bad One
Earn-outs aren’t automatically wrong, but they’re frequently written in a way that makes them hard to collect.
If there’s an earn-out, you want the LOI to cover:
- Metric definition: Revenue, gross profit, EBITDA, contribution margin, not ‘adjusted’ anything without rules
- Control rights: Who decides pricing, staffing, marketing spend and product changes during the earn-out
- Reporting cadence: Monthly management accounts, with a dispute mechanism
Operator rule: if the buyer controls the levers that decide whether you get paid, you’re not negotiating an earn-out, you’re taking a bonus scheme.
Exclusivity: Short, Specific, Conditional
Exclusivity is where founders lose leverage. Buyers love it because it reduces competition and slows you down. You can still agree to it, but make it earn its place.
A workable exclusivity clause should have:
- Duration: 14 to 45 days for most SMEs, longer only with a clear reason
- Conditions: Buyer provides proof of funds, appoints advisers, agrees a diligence list within 48 hours
- Process milestones: Heads of terms signed, data room open date, management meeting date, draft SPA date
- Automatic expiry: If milestones slip without good cause, exclusivity ends
If you’re selling and they want 90 days exclusive without a timetable, that’s not a process, it’s a holding pattern.
Costs, Confidentiality And ‘Who Pays For The Mess?’
Most LOIs make each side pay their own costs. That’s normal. But you can still add discipline.
- Cost cap: If the buyer demands specialist reports, agree a cap or make them pay
- Confidentiality: Define who can access information and set rules for approaching staff and customers
- Publicity: No announcements without written consent
Binding sections are usually confidentiality, exclusivity and costs. Everything else is typically ‘subject to contract’, but don’t assume. Have your solicitor confirm what’s binding.
A Simple LOI Timeline That Doesn’t Drift
Most deals don’t fail because the product is bad. They fail because people run out of energy, cash, or patience. A dated LOI keeps momentum.
Here’s a practical, founder-friendly timeline for a straightforward SME deal:
- Day 0 to 3: LOI signed, advisers appointed, diligence request list agreed
- Day 4 to 14: Data room open, management Q&A, site visit, initial legal review
- Day 15 to 30: Financial diligence closes, SPA first draft circulated, key risks resolved
- Day 31 to 45: Final SPA, financing confirmed, completion prep, sign and complete
Completion check: if your LOI doesn’t name a target completion date, you’ve left the door open for endless ‘one more question’ loops.
The One-Sentence Offer Template You Can Use
When founders ‘negotiate’ an LOI, they often negotiate feelings. You want a clean, fill-in-the-blanks offer that you can mark up.
Offer template: ‘We propose to acquire [X]% of [Company] via a [share purchase/asset purchase] for an enterprise value of £[X] on a cash free, debt free basis, subject to a normalised working capital peg of £[X], with £[X] payable at completion and £[X] deferred/earn-out over [X] months against [metric], with exclusivity for [X] days tied to the timetable in this letter.’
Use it to force specificity. If the buyer can’t fill in the blanks, they’re not ready.
Validation In 7 To 14 Days: Small Tests That De-Risk The Deal
You don’t need months to validate whether this deal is real. You need a handful of ‘proof points’ that confirm the buyer’s capability and your readiness.
Run these tests within 7 to 14 days of signing a letter of intent:
- Funds test: Proof of funds or lender term sheet in writing
- Decision-maker test: A meeting with the person who can sign, not just the scout
- Adviser test: Buyer introduces their solicitor and accountant, with named individuals and first call dates
- Data discipline test: Buyer accepts a structured Q&A process and doesn’t repeatedly go around it
If they fail two of these, your response isn’t to argue, it’s to shorten exclusivity or reopen the market.
Pricing And Unit Economics That Hold At Small Scale
Even in M&A, unit economics matter. Buyers will translate your story into a margin and cash conversion argument. You should do it first.
Three quick numbers to know cold before you negotiate your letter of intent:
- Contribution margin: Revenue minus direct costs, including delivery and support. If it’s 35% on £2m revenue, you’ve got £700k to cover overhead and profit.
- CAC payback: If you spend £60k per month on sales and marketing and add £30k gross profit per month, you’re at a 2-month payback. If it’s 10 months, buyers will push risk onto earn-out.
- Cash conversion: If EBITDA is £500k but working capital absorbs £250k each year, buyers will haircut valuation or tighten working capital terms.
Operator framing: the cleaner your unit economics, the less the buyer needs protective clauses, and the more you can keep the deal simple.
Operational Guardrails That Protect Margin And Time During Diligence
Signing a letter of intent can turn your business into a diligence factory. If you let it, you’ll miss targets, which then becomes a valuation discussion.
Put these guardrails in place on day one:
- One owner: Appoint a single deal lead internally, everyone else feeds them
- Weekly cadence: One scheduled call, one written update, one Q&A log
- Data room rules: Version control, dated uploads, nothing informal in email threads
- Customer and staff protection: No outreach without your written approval and a joint script
- Trading focus: Keep a ‘run the business’ KPI dashboard and review it twice weekly
Completion check: if your sales pipeline coverage drops below 3x next month’s target during diligence, you’ve allowed the process to damage the asset you’re selling.
Mini Cases: How LOIs Go Right And Wrong
Case 1: The 30-day exclusivity that stayed tight
A Leeds-based B2B SaaS firm agreed 30 days exclusivity, but tied it to three dated milestones: data room open in 48 hours, site visit by day 7, SPA draft by day 21. The buyer missed the SPA date, exclusivity expired automatically, and the seller re-engaged a second bidder. The first buyer came back, moved faster, and improved cash at completion by £250k.
Case 2: The working capital ‘gotcha’
A Midlands distributor agreed a headline price of £4m cash free, debt free. The LOI didn’t define a working capital peg, and the buyer later proposed a peg based on the lowest month in the year. The seller effectively gave up £180k. A tighter LOI would have anchored the peg to a 12-month average and made seasonality explicit.
Case 3: The earn-out with no levers
A services agency accepted a 40% earn-out linked to EBITDA. Post-completion, the buyer centralised delivery, raised overhead allocations, and changed pricing. EBITDA dropped, earn-out payments collapsed. The LOI should have required revenue-based metrics or control rights over pricing and resourcing during the earn-out period.
Common Risks And Practical Hedges
Most LOI mistakes aren’t dramatic. They’re small, avoidable oversights that stack up.
- Risk: Vague price mechanics
Hedge: Define cash, debt and working capital in the LOI, including a peg and example calculation. - Risk: Exclusivity with no leverage
Hedge: Make exclusivity conditional on milestones and proof of funds, set an automatic expiry. - Risk: Buyer fishing for intel
Hedge: Stage information release, start with anonymised data, expand access as commitment increases. - Risk: Deal team burnout
Hedge: Weekly cadence, Q&A log, and an internal ‘stop doing list’ for the diligence period. - Risk: Scope creep
Hedge: List included and excluded assets, IP, property, and key contracts at LOI stage.
Do And Don’t Checklist Before You Sign
Print this and tick it off. It’s the boring stuff that saves you.
- Do: State what’s binding and what’s not, in plain language.
- Do: Put dates on everything, including a target completion date.
- Do: Limit exclusivity and attach it to milestones.
- Do: Define working capital and debt-like items, not just the headline price.
- Don’t: Accept an earn-out without control rights and metric definitions.
- Don’t: Allow customer or staff approaches without written approval.
- Don’t: Treat the LOI as ‘just a formality’, it sets the tone for the whole deal.
Download The Due Diligence Pack And Tighten Your LOI Process
If you want to move faster without getting sloppy, download the Due Diligence Pack: Financial, Legal & Operational Templates and use it to structure your data room, your Q&A log and the evidence you’ll reference in your letter of intent. It’s the simplest way to keep control of the process while you keep the business trading.
Key Takeaways
- A letter of intent should make the deal legible: price mechanics, scope, timetable and walk-away points, not vague optimism.
- Validate the buyer in 7 to 14 days with proof of funds, decision-maker access and milestone-based exclusivity, so you don’t lose leverage.
- Protect margin and time with operational guardrails, tight data room discipline and clear definitions on working capital and earn-outs.
FAQ For Letter Of Intent (LOI)
Is a letter of intent legally binding in the UK?
Usually it’s mostly non-binding, but specific sections like confidentiality, exclusivity and costs can be binding if drafted that way. Treat it as a legal document and have a solicitor confirm exactly what creates obligations.
How long should exclusivity last in an LOI?
For many SMEs, 14 to 45 days is enough if the timetable is tight and the buyer is organised. If a buyer wants longer, ask what diligence work requires it and tie it to milestones with automatic expiry.
What’s the difference between Heads of Terms and a letter of intent?
In practice they’re often used interchangeably in UK deals, both aiming to summarise commercial terms before contracts. What matters is content: the clauses, definitions, timetable and binding sections, not the label on the front page.
Can I negotiate after signing a letter of intent?
Yes, most commercial terms are ‘subject to contract’, but renegotiation usually happens when diligence reveals issues or trading changes. If your LOI is vague, renegotiation becomes constant and expensive, so get specificity early.
Should a letter of intent include a working capital peg?
It should, because working capital is one of the easiest ways for value to move without changing the headline price. A peg based on a 12-month average with clear definitions is a common, defensible starting point.
What information should I avoid sharing before the LOI?
Avoid customer lists, pricing by customer, staff compensation detail and sensitive supplier terms until there’s a signed NDA and a credible process. You can share aggregated metrics early, then stage access as commitment increases.
How do I stop an LOI turning into endless diligence?
Build a dated process into the LOI: open date for the data room, Q&A windows and a deadline for the first draft SPA. Operationally, run a single Q&A log and one weekly diligence call so you control the bandwidth drain.
