Who this is for: business owners and founders who have received, or are about to receive, an offer for their company.
Most sellers treat the LOI as a lightweight document. It feels preliminary, it is described as non-binding, and it arrives before the lawyers are properly involved.
That is where the trap begins.
An LOI is not just an expression of interest. It sets the commercial tone, shapes expectations, and quietly locks in terms that are hard to unwind later. Even where the wording is non-binding, the buyer will treat it as the agreed framework. Change a key point afterwards and you are retrading.
A well-discussed LOI is good for a seller. It brings certainty early. The goal is not to resist it. The goal is to settle what matters before time, cost and momentum start working against you.
Money in the pocket, not just valuation
The first trap is focusing on the headline number.
A buyer may offer an attractive figure. The figure does not tell you what reaches your account.
| Ask before signing | Why it moves your proceeds |
|---|---|
| Cash, shares, or a mix? | Shares are not cash at close |
| Paid at closing or staggered? | Deferred money carries risk |
| Cash-free, debt-free? | The definitions are negotiated, not standard |
| Normalised working capital adjustment? | Can move the final figure materially |
| Escrow or retention? | Money held back, sometimes for years |
| Deductions for tax, shareholder loans, unpaid expenses? | All come off the top |
A S$20 million deal feels very different once you account for debt, working capital, deferred payments, escrow and tax leakage. The real amount at closing is often materially lower.
Negotiate around proceeds, not price.
Ask for a simple funds flow view early. If the buyer cannot show you, even in principle, what the closing payments look like, you do not yet have clarity on value.
Which parts of an LOI actually bind you
Fewer than sellers assume, and more than they are comfortable with once it is spelled out.
Exclusivity is one of the few terms in an LOI that is often expressly binding.
The earn-out gets agreed before the mechanics do
That is what makes it dangerous at LOI stage.
An earn-out sounds aligned. The buyer believes in the growth story, and you share the upside. In practice it transfers future performance risk back to you. If part of your consideration depends on revenue, EBITDA or retention, the detail is the deal.
Settle these before signing:
- What exact metric is measured, and how is it defined?
- Who controls the business after closing?
- Can the buyer change pricing, headcount or cost allocation in ways that move the metric?
- What information rights do you have?
- How and when is it calculated and paid?
- What happens in a dispute?
A vague earn-out is dangerous precisely because it looks agreeable. When the lawyers arrive, the buyer drafts the mechanism. Wide control for them. Limited protection for you.
What you are still carrying after closing
More than most sellers expect.
Sellers often assume the buyer takes over everything. Buyers often expect items to stay with the seller, be settled before closing, or be specifically indemnified. Tax exposures. Legacy employee claims. Pending disputes. Unrecorded creditor balances. Related-party balances.
If the LOI is silent on liabilities, it is not neutral. It is unresolved.
Frequently asked questions
Is a letter of intent legally binding?
Usually only in part. Most of an LOI is technically non-binding, but exclusivity is often expressly binding.
Does calling it a term sheet instead of an LOI change anything?
Not materially in M&A. The label follows convention — term sheet in fundraising, LOI in company sales — but what binds you is the wording, not the title on the front page.
How long should exclusivity in an LOI last?
Long enough for the buyer to complete diligence, short enough that you keep leverage. Tie the clock to milestones, not a bare calendar period.
Can I renegotiate the LOI after signing?
You can try, and you will be seen as retrading with less leverage than you have now. That is the argument for settling the mechanics upfront.
Last reviewed: October 2026.
