The 5 Most Common LOI Mistakes Founders Make (And How to Fix Them Before Signing)

A letter of intent feels like a milestone. After months of conversations, the buyer has finally put numbers on paper and asked you to sign. Most founders treat the LOI as a formality on the way to the real contract. That is the mistake. The LOI is the document that quietly defines the rest of your transaction. The exclusivity period, the no-shop, the purchase price formula, the buyer’s outs: all of these are negotiated here, before you have any real leverage. The five mistakes below show up in almost every first deal a founder signs. Each one is fixable, but only before the ink dries.

Mistake 1: Over-Long Exclusivity Windows

Buyers almost always ask for ninety to one hundred twenty days of exclusivity. They want time to do diligence, get financing, and negotiate the definitive agreement without competition. That is fair. What is not fair is exclusivity that runs longer than the time the buyer realistically needs to close. Every extra day of exclusivity is a day you cannot talk to another buyer, even if the deal in front of you is quietly falling apart.

The fix: tie exclusivity to specific milestones, not a long calendar window. Sixty days to deliver a draft purchase agreement. Fifteen days of mark-up. A hard stop if financing has not been committed by a date certain. If the buyer misses a milestone, exclusivity ends.

Mistake 2: Fuzzy Purchase-Price Formulas

The headline number in the LOI is usually a multiple of EBITDA, but the definitions matter more than the multiple. Is EBITDA based on the trailing twelve months at signing, or at closing? Is it pre-addback or post-addback? Are addbacks subject to the buyer’s accountant’s approval, or to an agreed list? What is the working capital target, and how is it calculated? Are there any deductions for indebtedness, transaction expenses, or change-of-control payments that the buyer wants to take out of the proceeds?

Each of these undefined terms is an opportunity for the price to shrink between LOI and closing. The fix is to negotiate the calculation methodology in the LOI itself, not in the definitive agreement. If the buyer pushes back, that tells you something about how the rest of the deal will go.

Mistake 3: Missing Financing Contingencies

If the buyer needs debt or equity to close, you want to know whether they have it lined up. A buyer who has a committed debt facility and equity behind them can close on the timeline you agree to. A buyer who is still raising the money is a buyer who can walk away at any time, citing market conditions or a failed financing.

The fix is to require either a financing-out that is narrow and time-limited, or to require evidence of committed financing as a condition to exclusivity. Some sellers ask for a refundable break fee if the buyer cannot finance. The leverage to negotiate this is highest before you sign, not after.

Mistake 4: No-Shops Without Carve-Outs

A no-shop clause prevents you from soliciting other buyers during exclusivity. Standard. But what happens when an unsolicited offer comes in over the transom? A poorly drafted no-shop bars you from even responding. A well-drafted one allows you to receive and consider a superior proposal, and to terminate the existing deal if a fiduciary duty analysis supports it.

You are not a public company with a board fiduciary duty, but the principle applies. Build in a carve-out for unsolicited superior proposals. Define what makes a proposal superior (typically, materially higher value and a higher probability of closing). Keep your optionality open.

Mistake 5: Over-Allocating Value to Non-Competes

Buyers sometimes propose to allocate a significant portion of the purchase price to a non-compete agreement with you. They do this for tax reasons on their side. The problem is on yours: payments allocated to a non-compete are ordinary income to you, taxed at federal rates up to thirty-seven percent, plus state. Payments for goodwill or stock are capital gains, taxed at federal rates up to twenty percent.

Allocating two hundred thousand dollars of a five million dollar deal to a non-compete can cost you sixty thousand dollars in unnecessary taxes. The fix is to negotiate a reasonable allocation in the LOI: the non-compete should reflect the actual value of the restriction to the buyer, not be a tax-shifting device. If the buyer insists on a large non-compete allocation, ask them to gross you up for the tax difference.

A Word on Reps and Warranties Placeholders

Many LOIs include a passing reference to "customary representations and warranties" or a similar phrase, then move on. The trouble is that customary in your buyer’s deal practice may not be customary in yours. Reps about taxes, employee classifications, environmental liabilities, and intellectual property ownership are negotiated very differently by different buyers, and so are the survival periods and caps attached to them. Even at the LOI stage, it is worth pinning down the survival period (typically twelve to twenty-four months for general reps), the indemnity cap (typically ten to twenty percent of EV for non-fundamental reps), and the basket structure (deductible vs. tipping basket). These are the levers that determine your actual at-risk exposure post-closing.

Before You Sign Anything

A letter of intent that is mostly non-binding looks low-stakes, but exclusivity and the no-shop are binding from the moment of signature. Once you have committed to a buyer, your leverage drops sharply. Spend the time now to negotiate the LOI as carefully as you would the purchase agreement. The cost of slowing down by two weeks at the LOI stage is far less than the cost of accepting a structure you cannot unwind later.

Thinking about signing an LOI? Have your transaction counsel review it before you do. Contact GNS Law to schedule a same-week LOI review.