In the initial LOI draft, the buyer proposes a standard cash-free, debt-free deal, but their definition of indebtedness includes accrued PTO, unbilled vendor payables, and customer loyalty liabilities. How do we negotiate the indebtedness definition at the LOI stage before exclusivity traps us?

Question

Tyler Smith · Accepted Answer

The phrase cash-free, debt-free sounds straightforward, but buyers routinely manipulate the definition of indebtedness in the LOI to chip away at your purchase price. Every item categorized as debt is deducted dollar-for-dollar from your closing proceeds. If a buyer successfully includes accrued paid time off, customer loyalty points, deferred warranty obligations, or routine unbilled vendor payables in the definition of debt, they effectively take hundreds of thousands of dollars off the purchase price while retaining your working capital assets.

You must establish firm boundaries inside the LOI before granting exclusivity. Never sign a letter of intent that leaves the definition of indebtedness open to interpretation or future legal drafting. Insist that the LOI explicitly defines indebtedness as third-party funded debt, promissory notes, capital equipment leases, formal tax deficiencies, and bank overdrafts.

All operational liabilities that fluctuate during ordinary business operations, such as employee accrued vacation, routine trade payables, and standard customer credit reserves, must be governed strictly by the Net Working Capital peg. When these liabilities are handled inside working capital, they are offset against your accounts receivable and inventory rather than acting as a direct haircut on your purchase price.

Use your weekly Level 10 Meeting to collaborate with your CFO or financial advisor to review every liability on your balance sheet prior to signing. Locking down these structural definitions in the preliminary LOI eliminates the buyer's ability to manufacture hidden price cuts during legal diligence.