What Clauses Should You Watch Out for in a Letter of Intent?

For many founders, the Letter of Intent (LOI) feels like a celebratory milestone — a signal that a buyer is serious and the deal is finally taking shape. But seasoned M&A professionals know that the LOI is more than a handshake; it’s a strategic document that can shape the entire trajectory of the transaction. Overlooking key clauses at this stage can lead to unfavorable terms, lost leverage, or even a failed deal.

At iMerge, we’ve advised on hundreds of software and technology transactions, and we’ve seen firsthand how the fine print in an LOI can either protect or undermine a seller’s position. Below, we break down the most critical LOI clauses to scrutinize — and why they matter.

1. Purchase Price and Structure

While the headline number often grabs attention, the structure behind it is where the real story lies. Is the deal structured as an asset sale or a stock sale? How much of the purchase price is paid upfront versus deferred through earn-outs or seller financing?

Key considerations include:

• Earn-outs: These are often tied to future performance metrics. Ensure the metrics are clearly defined, achievable, and not subject to unilateral buyer control.
• Escrow or holdbacks: Understand how much of the purchase price will be withheld, for how long, and under what conditions it may be forfeited.
• Working capital adjustments: These can significantly impact the final payout. Make sure the target working capital is based on normalized, seasonally adjusted figures.

2. Exclusivity (No-Shop) Clause

This clause restricts the seller from soliciting or engaging with other potential buyers for a defined period — often 30 to 90 days. While exclusivity is standard, it should be balanced with protections for the seller.

Watch for:

• Duration: Shorter is better. If the buyer needs more time, they can request an extension with justification.
• Termination rights: Ensure you can exit exclusivity if the buyer fails to meet key milestones (e.g., submitting a draft purchase agreement).
• Reverse breakup fees: In rare cases, sellers may negotiate a fee if the buyer walks away without cause.

As we noted in Completing Due Diligence Before the LOI, entering exclusivity too early — before a buyer has been properly vetted — can be risky. A strong M&A advisor can help you time this correctly.

3. Binding vs. Non-Binding Language

Most LOIs are non-binding in terms of the transaction itself, but certain provisions — such as confidentiality, exclusivity, and governing law — are typically binding. It’s critical to clearly delineate which sections are enforceable and which are not.

Ambiguity here can lead to disputes or even litigation. For example, if a buyer claims the LOI was binding and you walk away, you could face legal exposure. Conversely, if you assume a clause is non-binding and it’s not, you may be locked into unfavorable terms.

4. Due Diligence Scope and Timeline

The LOI should outline the scope and duration of the buyer’s due diligence. This includes access to financials, customer contracts, IP, and employee data. A vague or open-ended diligence clause can lead to “death by a thousand cuts” — where the buyer drags out the process, uncovers minor issues, and uses them to chip away at valuation.

To protect yourself:

• Set a clear diligence timeline (e.g., 30–45 days).
• Define what constitutes a material issue that could justify a price adjustment.
• Limit re-trading by requiring that any proposed changes to terms be based on material findings only.

5. Post-Closing Roles and Employment Terms

If the buyer expects you or your leadership team to stay on post-close, the LOI may include high-level terms around employment, compensation, or equity rollover. These terms are often non-binding, but they set expectations and can influence negotiations later.

Be cautious of vague language like “to be mutually agreed upon” — it can lead to misalignment down the road. If your continued involvement is critical to the buyer, use that as leverage to negotiate favorable terms early.

6. Confidentiality and Public Announcements

Most LOIs reaffirm existing NDAs or include new confidentiality provisions. However, some buyers may seek the right to make public announcements or notify third parties (e.g., investors, partners) prematurely.

Ensure that:

• All public disclosures require your written consent.
• Confidentiality survives termination of the LOI.

In competitive processes, premature disclosure can spook customers or employees — or even alert competitors. As we’ve discussed in How to Ensure Confidentiality During the Sale Process, managing information flow is critical to preserving value.

7. Governing Law and Jurisdiction

This clause determines which state’s laws will govern the LOI and where disputes will be resolved. While it may seem like boilerplate, it can have real implications if a disagreement arises. Ideally, this should be a neutral or familiar jurisdiction — not one that heavily favors the buyer.

8. Termination Rights

Finally, the LOI should specify how and when either party can walk away. This includes:

• Automatic termination after a set period (e.g., 60 days) if no definitive agreement is signed.
• Termination for breach of exclusivity or confidentiality.
• Mutual termination by written agreement.

Clear termination rights prevent ambiguity and give both parties a clean exit if the deal stalls.

Why These Clauses Matter More Than You Think

In the M&A process, leverage shifts quickly. Once you sign an LOI and enter exclusivity, your negotiating power diminishes. That’s why it’s essential to get the LOI right — not just the economics, but the mechanics, protections, and expectations it sets.

Firms like iMerge specialize in helping software and technology founders navigate these nuances. We’ve seen how a well-structured LOI can accelerate a deal — and how a poorly drafted one can derail it. From exit planning strategy to final negotiations, our role is to ensure your interests are protected at every stage.

Conclusion

The LOI is not just a formality — it’s a strategic document that sets the tone for the entire transaction. By carefully reviewing and negotiating key clauses, you can preserve leverage, avoid surprises, and increase the likelihood of a successful close.

Founders navigating valuation or deal structuring decisions can benefit from iMerge’s experience in software and tech exits — reach out for guidance tailored to your situation.