LOI anatomy part one: price is only the first line
Define the economic headline before exclusivity begins.
A letter of intent (LOI) is usually nonbinding in many of its commercial provisions, but it establishes the framework from which the definitive agreement will be negotiated. The economic section should therefore be clear enough to expose major differences before the seller grants exclusivity.
Start with the valuation basis. Is the stated figure enterprise value or equity value? Is it cash-free and debt-free? Which items count as debt or debt-like obligations? Will excess cash remain with the seller or transfer with the business?
Next, identify each form of consideration. Separate cash at closing from buyer equity, rollover ownership, seller financing, escrowed amounts, holdbacks, and earnouts. State the principal terms needed to evaluate noncash consideration, including valuation methodology, seniority, liquidity restrictions, security, interest, and payment conditions where applicable.
Then address working capital. The LOI may not contain a final schedule, but it should state that the transaction assumes a normalized level of working capital and describe how the target and closing adjustment will be determined.
Finally, build an estimated bridge from enterprise value to proceeds. The bridge will change as diligence continues, but an early version reveals assumptions that a headline number can conceal.
Whether particular LOI terms are binding depends on the document and governing law. Transaction counsel should review the complete letter before signature.