Common LOI Mistakes and How to Avoid Them
- Brandon Chicotsky
- 2 days ago
- 9 min read
A Letter of Intent (LOI) is a critical step in business acquisitions, especially for companies with under $25 million EBITDA. While mostly non-binding, certain sections like confidentiality and exclusivity are legally enforceable. Mistakes in drafting an LOI can lead to disputes, delays, or significant financial loss. Here are the key errors to avoid:
Treating the LOI as informal: Misunderstanding binding vs. non-binding clauses can result in legal challenges.
Agreeing to unfair exclusivity terms: Overly long or vague timelines can lock you in while buyers delay.
Using vague financial terms: Ambiguity in valuation or payment structures often favors the buyer during renegotiations.
Ignoring tax and risk factors: Overlooking deal structure implications can lead to IRS audits or unexpected liabilities.
Signing prematurely: Rushing into an LOI without preparation weakens your position during due diligence.
The LOI should clearly define terms, separate binding clauses, and include milestones to protect your interests. Preparation with financial and legal advisors ensures smoother negotiations. Avoid these pitfalls to maintain leverage and safeguard your sale.
What an LOI Is Supposed to Do
A Letter of Intent (LOI) acts as a straightforward guide for your sale process. It shows that both parties are serious about moving forward, outlines the proposed purchase price based on key financial metrics, and explains how the deal will be structured. The LOI also breaks down payment terms - like how much will be paid upfront versus through earn-outs or escrow - and sets an exclusivity period, usually 30–60 days. During this time, you agree not to negotiate with other buyers while due diligence is underway. It's crucial to be clear here, as the difference between binding and non-binding clauses can have significant legal implications.
To steer clear of common mistakes, it's essential to know which parts of the LOI are legally binding. Sections like exclusivity, confidentiality, non-compete agreements, and the closing date come with legal risks if breached. Even non-binding clauses can create unintended obligations if the language is too vague. The LOI also establishes specific milestones for due diligence, ensuring the process stays on track and avoids unnecessary delays or irrelevant requests. These milestones typically cover the review of financials, operations, and legal documents, keeping the process efficient and focused.
Bringing in expert advice can make a significant difference in crafting an effective LOI. God Bless Retirement specializes in helping sellers define their goals before drafting begins. Their approach includes a thorough evaluation of what you want from the sale, certified valuations, access to a strong buyer network, and support from CPAs and financial planners. This preparation ensures the LOI is clear and protects your interests, reducing the risk of disputes - especially in cases where unclear earn-out terms could leave sellers vulnerable.
Common LOI Mistakes and How to Fix Them
When it comes to negotiating a Letter of Intent (LOI), even small missteps can lead to major setbacks. Let’s dive into some common mistakes sellers make and how to address them effectively.
Mistake 1: Treating the LOI as Just a Formality
Some sellers view an LOI as a casual agreement - just a handshake in writing. But this misconception can lead to serious legal trouble. Even if your LOI is labeled "non-binding", certain provisions, like exclusivity, confidentiality, and non-compete clauses, are legally enforceable. Violating these terms - such as sharing deal details publicly or courting other buyers during the exclusivity period - can result in fines, damages, or injunctions[2].
Ambiguity in the LOI’s language only makes matters worse. If it’s unclear which sections are binding, you could face unexpected legal challenges. Courts may even impose a "good faith and fair dealing" obligation, holding you accountable for bad faith actions, even on non-binding terms[6]. To avoid such pitfalls, platforms like God Bless Retirement offer expert guidance by involving CPAs, M&A attorneys, and other professionals to ensure your LOI is clear, protective, and aligned with your goals[1].
Mistake 2: Accepting Unfair Exclusivity Terms
Exclusivity clauses tie you to a single buyer for a set period, usually 30 to 60 days. The problem? Agreeing to overly long or vague exclusivity terms. Some buyers push for six-month periods without clear milestones, leaving you stuck while they delay due diligence. If the buyer drags their feet, you lose valuable time and potential opportunities[3].
To protect yourself, insist on performance milestones within the exclusivity clause. For example, require the buyer to complete financial reviews or other key steps within specific timeframes. If they miss those deadlines, the exclusivity period should end. Advisors like God Bless Retirement can help structure these terms to ensure the process stays on track and your leverage remains intact[3].
Mistake 3: Using Vague Economic Terms
Phrases like "reasonable working capital" or "industry-standard adjustments" might seem harmless, but they can create headaches later. Ambiguity in economic terms often leads to renegotiations after due diligence, usually favoring the buyer. For instance, a $10 million deal with unclear earn-out terms could leave you exposed to disputes over valuation or capital retention[3].
To avoid this, your LOI should clearly outline the purchase price in U.S. dollars, the payment structure (e.g., all-cash, stock, earn-outs), and any working capital adjustments. Using certified business valuations ensures accurate figures that both parties can rely on. God Bless Retirement offers NACVA-certified valuations that are trusted by buyers, sellers, banks, and even the IRS - not rough estimates that could cost you heavily down the road[1].
Mistake 4: Ignoring Tax and Risk Issues Early
The way a deal is structured - whether as an asset sale or an equity sale - has major tax implications. Yet, many sellers overlook these details until it’s too late. Failing to address tax, indemnity, or liability issues early on can lead to costly surprises, such as IRS audits or disputes over overly broad non-compete clauses[3][4].
One-sided risk allocations can also weaken your negotiating position. To avoid this, bring in CPAs and M&A attorneys before signing the LOI. They can help you plan for tax implications, structure the deal, and address indemnity protections upfront. Services like God Bless Retirement coordinate these professionals to tackle these issues early, preventing them from derailing the deal later[1].
Mistake 5: Signing Before You're Ready
Your strongest leverage is before you sign the LOI. Once you’re under exclusivity, the buyer’s due diligence often uncovers issues - such as incomplete financial records, outdated contracts, or missing documentation - that can shift the deal in their favor[5]. Sellers who rush into signing without proper preparation often find themselves scrambling to catch up, which can delay the process and even cause buyers to lose interest[4].
Before signing, ensure you’ve prepared all necessary documents, including profit-and-loss statements, tax returns, customer lists, and operational details. If you’re not ready, don’t sign. God Bless Retirement helps sellers prepare thoroughly before reaching the LOI stage, ensuring you maintain control and confidence throughout the negotiation process[4].
How to Draft a Strong LOI
Following the earlier discussion on common LOI pitfalls, let’s dive into how to draft a strong LOI that sets the stage for a smooth transaction.
A well-crafted LOI strikes a balance - it’s detailed enough to ensure both parties understand their commitments but avoids the complexity of a full purchase agreement. The key is to clearly outline essential terms, deal structure, and timelines, while leaving room for further negotiation in the definitive agreements.
Separate Binding and Non-Binding Provisions It’s crucial to distinguish between binding and non-binding sections. Most business terms - like purchase price, payment structure, and closing conditions - should be labeled as non-binding, signaling they’re subject to further negotiation. On the other hand, clauses covering confidentiality, exclusivity, governing law, and expense allocation should be explicitly marked as binding. Placing these protective provisions in a separate section reduces the risk of the entire LOI being misinterpreted as a legally enforceable contract.
Be Specific and Clear Precision is your best friend when drafting an LOI. Use clear, straightforward language to define major terms. For instance, instead of vague statements, specify: "The purchase price is $12,000,000, calculated as 6.0x trailing-twelve-month EBITDA of $2,000,000 from the latest financials as of June 30, 2025." Clearly state whether the deal involves an asset sale or equity sale, list what’s included or excluded, and provide a breakdown of the payment structure. This could include details on cash at closing, seller notes, earn-outs, escrows, and any working capital targets. Timelines should also be clear - use U.S.-style formats, such as 30–60 days for due diligence and another 30 days for drafting final agreements.
Be Prepared Before signing an LOI, ensure you have all critical documents ready. This includes two to three years of financial statements, tax returns, key contracts, customer and vendor lists, and operating procedures. Engaging experienced professionals early can make a significant difference. For example, God Bless Retirement specializes in coordinating key professionals to ensure accurate valuations, economic terms, and proper tax planning for businesses with less than $25 million EBITDA. Their focus on confidentiality and long-term financial goals helps avoid costly missteps.
Conclusion
The Letter of Intent (LOI) lays the groundwork for both the financial and legal aspects of your deal. Overlooking vague terms or ignoring potential risks can lead to unfavorable conditions that erode the value of your sale and weaken your negotiation position. For many U.S. business owners, the proceeds from selling their business are central to their retirement plans - an LOI that safeguards value is a direct step toward securing your future lifestyle and family’s well-being.
Consider the impact of different LOI strategies. A seller who agrees to a six-month exclusivity period with ambiguous earn-out terms might endure drawn-out due diligence and unexpected price reductions. On the other hand, a seller who negotiates a 45-day exclusivity period with clear terms and milestones is more likely to close on time, with minimal changes that preserve value and ensure a smooth transaction.
These scenarios highlight the importance of a thorough final review. Before signing, evaluate your LOI using a critical checklist: Is the exclusivity period reasonable and clearly defined? Are the financial terms precise? Have tax and risk considerations been addressed? Are you fully prepared for the next steps? Pinpoint any unclear or biased elements, then meet with your M&A attorney, CPA, and broker to resolve those issues before moving forward.
God Bless Retirement works with M&A attorneys, CPAs, and other professionals to protect the interests of sellers with companies generating up to $25 million in EBITDA. Their services include certified valuations, connecting sellers with qualified buyers, aligning tax and legal strategies, and tracking milestones - all while maintaining confidentiality. This comprehensive approach ensures sellers negotiate from a position of strength and avoid mistakes that could jeopardize their retirement goals.
Approaching LOI negotiations with discipline sets the stage for a seamless transaction and a successful exit.
FAQs
What’s the difference between binding and non-binding clauses in an LOI?
When it comes to a Letter of Intent (LOI), binding clauses carry legal weight. These clauses obligate the parties to fulfill specific terms, and failing to do so could result in legal consequences. In contrast, non-binding clauses outline intentions without creating a legal commitment, giving the parties more freedom to back out without facing penalties.
Knowing the difference between these two types of clauses is essential. It helps you avoid unexpected legal responsibilities or missed chances to enforce important terms. Taking the time to review and clearly define which parts of the LOI are binding can make negotiations smoother and safeguard your interests.
How can I make sure the exclusivity terms in an LOI are fair and protect my interests?
When drafting exclusivity terms in your Letter of Intent (LOI), it’s crucial to ensure they protect your interests while remaining balanced. Start by specifying the duration of the exclusivity, the scope of what it covers, and any conditions for renewal. Make sure to include a clause that allows for termination in case of a breach, and clearly outline confidentiality obligations to safeguard sensitive information.
You might also want to negotiate compensation if the agreement is terminated early. Collaborating with seasoned professionals - like legal advisors or business brokers - can help tailor the terms to your specific needs and steer clear of potential issues.
What tax issues should I consider before signing a Letter of Intent (LOI)?
Before agreeing to a Letter of Intent (LOI), it’s crucial to think about how taxes might affect both the buyer and the seller. Some important areas to consider are capital gains taxes, transfer taxes, and any unresolved tax liabilities that could influence the deal. Careful tax planning upfront can help sidestep surprise expenses and make the process more straightforward.
Consulting a qualified tax advisor or CPA is a smart move. They can analyze the deal structure, ensure it aligns with tax laws, and help you navigate potential pitfalls. This proactive step can save you from expensive errors later on and help you get the most out of the transaction.
