LOI to Purchase Agreement: What Changes and What Cannot
Updated: Sep 29
A signed letter of intent feels like the finish line. It is closer to the starting gun. Everything between the LOI and the purchase agreement tends to move in one direction, and it is not usually toward the seller.
What the LOI actually does
It is mostly non-binding on the commercial terms and binding on a few procedural ones. The binding parts typically include exclusivity, confidentiality, and who pays what expenses. The price, structure, and conditions are stated but subject to diligence.
That asymmetry is the whole problem. You grant exclusivity, which is real and enforceable, in exchange for a price that is provisional.
Why terms move after signing
Diligence uncovers something. An add-back does not survive testing. A contract turns out not to be assignable. A lender's appraisal lands low. Customer concentration proves worse than the summary suggested. Any of these gives a buyer a defensible reason to revisit price or structure, and by then you have been off the market for weeks with no alternative bidder.
This is why preparation before going to market matters more than negotiation after. A process where nothing surprises anyone is a process where the LOI price survives.
What to negotiate into the LOI itself
A defined and reasonably short exclusivity period, with an expiration that actually expires. A specific diligence list rather than an open-ended one, so the scope is bounded. Clear treatment of working capital, including how the target will be calculated. Escrow and indemnification parameters at least in outline. And a stated timeline with milestones.
The more of the eventual purchase agreement that is sketched in the LOI, the less room there is for reinterpretation later.
What the purchase agreement adds
Representations and warranties about your business, indemnification obligations if those reps prove wrong, caps and survival periods limiting your exposure, disclosure schedules that qualify everything, the working capital true-up mechanism, non-compete terms, and the conditions each side must satisfy to close.
These are not formalities. Indemnification caps, survival periods, and basket thresholds can move real money after closing, and they are negotiated by attorneys while everyone is tired and eager to finish. That is exactly when experienced representation earns its fee.
Common questions
Is a letter of intent binding?
Mostly not on commercial terms, but binding on procedural ones: exclusivity, confidentiality and expenses. That asymmetry is the risk, since you grant enforceable exclusivity in exchange for a provisional price.
Why do terms change after the LOI?
Diligence uncovers something. An add-back does not survive testing, a contract is not assignable, an appraisal lands low, or concentration proves worse than the summary suggested. By then you have been off the market for weeks.
What should I negotiate into the LOI?
A defined and reasonably short exclusivity period, a bounded diligence list, clear treatment of working capital including how the target is calculated, escrow and indemnification parameters in outline, and a stated timeline with milestones.
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