The LOI is an art form

When I first saw a letter of intent, I treated it roughly the way you'd treat a term sheet on a truck lease. A few pages. Some numbers. Language in the back saying most of it wasn't binding on anybody.

It is not the purchase agreement. Until the definitive documents are signed and the deal closes, the buyer can generally walk, and so can you.

Which creates a comfortable impression: we can work out the details later.

Sometimes you can. Sometimes you cannot. Knowing which is which is most of the skill in negotiating one of these, and I did not have that skill the first time.

Read the part that actually is binding

Start here, because it's the piece I glossed over.

Most LOIs are a mix. The economics — price, structure, what happens after closing — are usually nonbinding. But several provisions typically are binding, and the important one is exclusivity. Confidentiality is usually binding too, and so is whatever the document says about who pays expenses if the deal dies.

Sit with that arrangement for a second. You are signing something that legally obligates you to stop talking to other buyers, in exchange for terms that legally obligate the buyer to nothing at all.

That's not a scandal. It's how the market works, and a buyer about to spend real money on diligence has a fair reason to want the field cleared. But it means the "nonbinding" label on the front page is describing the half of the document that isn't costing you anything. Read yours carefully, and have your attorney tell you exactly which provisions survive if the transaction never closes.

Your leverage peaks the day before you sign

Before the LOI, the buyer is trying to win. Other buyers may still be circling. You haven't granted exclusivity. And the buyer knows that if the terms aren't attractive enough, you can go elsewhere or decide not to sell at all.

After the LOI, that changes. The chosen buyer is often the only buyer at the table, and everyone knows it.

You don't lose all your leverage — but it becomes a different kind, and less of it. Meanwhile the momentum builds on both sides. The buyer starts spending on attorneys, accountants, lenders, and quality-of-earnings work. You start producing documents, answering questions, pulling advisors and eventually employees into it. Weeks pass. Sometimes months.

By the time the purchase agreement is being drafted, both sides have put real money and real emotional energy into getting it done. Technically you can still walk away from a reasonably good deal. Practically, after months of that, walking away is extraordinarily hard — and the buyer's team knows that better than you do.

So the issues that materially drive your economics deserve thought before you sign, not after.

Price is where the analysis starts, not where it ends

Owners fix on the headline number, and I was no different.

If one buyer offers $8 million and another offers $7.2 million, the first one looks better. It may not be. The headline number doesn't tell you what you actually end up with.

The questions that determine that include: Is the price enterprise value or equity value? How much cash do you get at closing? How are debt and cash treated? What expenses come out of your proceeds? How much working capital are you required to leave behind? Is there an escrow or holdback? Rollover equity? An earnout? A seller note? Are you expected to stay on, and for how long? What non-compete are you agreeing to? What happens to real estate you own separately from the business?

An $8 million offer can end up behind a $7.2 million offer once those are answered. I don't mean marginally behind.

Working capital, and the fight I walked into

Working capital is the best example of something that looks minor at the LOI stage and isn't.

Most deals are priced on a cash-free, debt-free basis, with the seller required to deliver a normalized amount of working capital at closing. That sounds administrative. For a contractor it is anything but — the calculation runs through accounts receivable, accounts payable, accrued payroll, customer deposits, retainage, prepaids, inventory, work in process, and deferred revenue. Buyer and seller can hold sincerely different views about what "normal" means for any one of those.

If the LOI says only that there will be a customary working capital adjustment, you and the buyer may discover weeks later that you meant materially different things. On a business the size most of my readers own, the gap between two reasonable interpretations can run into six figures.

I know how that goes, because I lived the back half of it. By the time working capital became a real argument in my deal, I was already in exclusivity, the quality-of-earnings work was landing, and my ability to say then we don't have a deal was mostly theoretical.

That doesn't mean the exact peg has to be calculated before you sign the LOI. Often it can't be. It means you should understand that the issue exists, know roughly what your own normalized number looks like, and decide deliberately how much of it needs to be pinned down before you give up the right to talk to anyone else.

The money you don't get at closing

Earnouts and rollover equity deserve the same treatment, for the same reason: they're the parts of the price you haven't received yet.

An LOI might say you'll receive an additional $1 million if the company hits EBITDA targets over two years. That reads as clear. It isn't. How is EBITDA calculated? Who runs the business during those two years? Can the buyer allocate corporate overhead against it? Replace your people? Change pricing? Move customers to an affiliate? Roll in an acquisition? Sell the company mid-earnout?

Rollover is the same story. "Twenty percent rollover" tells you almost nothing. What entity are you investing in? What class of equity — the same one the sponsor holds, or something behind it? How is it valued, and valued as of when? What happens when the company raises more capital and you're asked to contribute or be diluted?

That last set matters more than it sounds like it does. I've written separately about how sale-date valuation on rollover equity can quietly cost you real money later.

None of this needs a ten-page appendix in the LOI. But if a meaningful share of your consideration is deferred, you should know whether enough of the framework has been agreed before you sign away your alternatives.

What's different about a Texas trade business

Contracting companies carry issues that a generic LOI form never contemplates: retainage, work-in-process and percentage-of-completion accounting, backlog, bonding relationships, vehicle fleets and capital leases, project-specific liabilities, bonus programs, prevailing-wage work, and customer concentration. Every one of those can move price, working capital, the debt calculation, indemnification, or what you owe after closing.

Then there's one that's specific to operating here. In Texas, the credential that lets your company do the work generally belongs to a person, not to the company. An HVAC company operates under an individually licensed air conditioning and refrigeration contractor through TDLR. A plumbing company operates under a designated Responsible Master Plumber — who can hold that designation for only one company at a time.

If that person is you, or a key employee the buyer hasn't met yet, then the buyer's ability to operate the day after closing depends on an individual human being's decision. That's not a diligence detail. That's leverage, on one side or the other, and it's better understood before exclusivity than during it.

"That wasn't the deal"

Here's the thing about a nonbinding document that surprised me most.

When a disagreement comes up during drafting of the purchase agreement — and it will — somebody will say that wasn't the deal. And then everyone goes and looks at the same piece of paper to find out what the deal was.

The buyer's attorney refers to the LOI. Your attorney refers to the LOI. The bankers refer to it. The principals refer to it.

Even when a provision is technically unenforceable, the commercial expectation it created carries weight. Which makes the wording matter. And it makes silence matter just as much — an issue the LOI addresses is far easier to hold onto later than an issue you assumed would get sorted out after diligence.

Assumed is doing a lot of work in that sentence. It usually is.

Knowing what to leave alone

The opposite error is real too, and I've watched people make it.

An owner or an advisor gets protective and tries to negotiate the entire purchase agreement through the LOI. That's usually unnecessary and occasionally counterproductive. Some issues are consequential but rarely contested. Some get handled efficiently by transaction counsel during drafting. Some aren't even relevant until diligence is substantially done. Spending all your capital on every conceivable point can turn a good buyer into a difficult one before you've started.

The goal isn't the longest LOI. It's identifying the handful of issues that genuinely drive your economics, your risk, and your post-closing obligations — and making a conscious decision about which of those need resolution before exclusivity begins.

That's why I call it an art form. Not knowing what can go in an LOI. Knowing what has to be settled now, what needs just enough clarity now to prevent a real fight later, what can safely wait for the purchase agreement, and what isn't worth the powder.

For most owners this is the largest financial transaction of their lives. A few sentences negotiated before the LOI is signed can carry more economic weight than dozens of pages negotiated after.

The document says the deal is nonbinding. That is not the same as saying it doesn't matter.