A buyer proposes paying 7x enterprise value, but the letter of intent requires all buyer-side third-party diligence, lender financing fees, and RWI policy costs to be deducted from closing proceeds. How do we define enterprise-to-equity bridge terms in the LOI to stop purchase price leakage?

Question

Tyler Smith · Accepted Answer

Headline enterprise value is vanity. Net equity value wired to your bank account at close is reality. Buyers frequently exploit ambiguous Letter of Intent (LOI) language to shift their own transaction expenses onto the seller, eroding hundreds of thousands of dollars in closing proceeds.

The enterprise-to-equity bridge must be explicitly locked down before signing the LOI. The formula is Enterprise Value, minus funded debt, minus transaction expenses, plus cash, plus or minus net working capital adjustment against the agreed peg. The danger lies in how transaction expenses are defined.

The LOI must clearly state that each party is solely responsible for its own professional advisory fees, including legal counsel, accounting diligence, investment banking, and tax advisory costs.

For deal-specific instruments that serve both parties, set exact cost-sharing boundaries:
- Representation and Warranty Insurance (RWI): The buyer and seller should split the premium, underwriting fee, and broker diligence cost fifty-fifty, or the buyer must fund the policy as their underwriting requirement.
- Lender financing fees: Any loan origination points, lender legal fees, environmental surveys, or collateral appraisal costs are buyer financing expenses and must never be treated as seller deductions.
- Diligence costs: The buyer buy-side Quality of Earnings, background checks, and technical audits must be paid entirely by the buyer.

Never agree to a generic net proceeds clause. Define every deduction explicitly in the LOI term sheet so your leadership team does not spend months negotiating purchase agreements only to discover an unexpected six-figure reduction at the closing table.