We received an LOI that includes standard language around 'customary reps and warranties' and a broad 'working capital target to be mutually agreed upon prior to close.' What specific economic terms must be locked down in the LOI before granting exclusivity so the buyer cannot weaponize ambiguity to retrade us later?

Question

Tyler Smith · Accepted Answer

The Letter of Intent is the peak of your negotiating leverage. Once you sign exclusivity, your leverage drops to zero while the buyer spends months conducting forensic diligence. If you accept broad, boilerplate language in the LOI, you are handing the buyer an open invitation to retrade your deal terms when you are emotionally and financially committed to closing.

To protect your net proceeds, eliminate ambiguity across five critical terms before executing the LOI:
- The Working Capital Target. Never agree to a peg to be determined during diligence. Define the exact calculation methodology in the LOI, including the historical period used, the exclusion of cash and funded debt, and how customer prepayments or deferred revenue will be treated.
- Indemnification Escrow Caps and Survival Periods. Specify the exact dollar holdback or percentage cap for general representations, typically five to ten percent, and set the survival window strictly between twelve and eighteen months.
- Rep and Warranty Insurance (RWI). If the buyer intends to use RWI, clarify who pays the underwriting fee and insurance premium, and confirm that the seller indemnity escrow drops to one half of one percent of enterprise value.
- Seller Note Terms. If the structure includes deferred consideration, define the exact interest rate, payment cadence, maturity date, subordination parameters, and whether cash interest can be blocked by senior lenders.
- Definition of EBITDA and Add-Backs. Attach your calculated adjusted EBITDA schedule as an exhibit to the LOI so the buyer cannot dispute agreed-upon historical adjustments during confirmatory diligence.

Use your Vision/Traction Organizer® (V/TO®) to align your ownership team on your non-negotiables before you enter LOI negotiations. Locking down structural mechanics in the LOI guarantees that confirmatory diligence confirms agreed-upon facts rather than reopening structural pricing debates.