Glossary
Letter of Intent (LOI) in M&A
A letter of intent is the document that sets out the headline terms of a deal, and starts the clock on exclusivity and diligence. Most of it is non-binding on price, but the exclusivity clause almost always binds, which means signing one takes the business off the market while the buyer investigates. At Treewalk we sit inside that window constantly, running the financial diligence that decides whether the deal survives it.
What an LOI actually commits you to
The price in an LOI is an opening position, not a contract. What binds is usually narrower and more consequential:
Exclusivity
, also called a no-shop. The seller cannot talk to other buyers for a fixed period, commonly 60 to 90 days.
Confidentiality
, carrying over from the NDA.
Access
, the seller’s obligation to open the books and the data room.
Cost allocation
, who pays for what during diligence.
The 90-day trap
Here is the failure mode we watch play out repeatedly, and it lands almost entirely on the seller.
A seller accepts an LOI at an attractive number. Exclusivity starts. Diligence begins, questions multiply, and the seller spends months answering them while still trying to run the business. Two LOI extensions later, the buyer walks because the earnings did not hold up. The seller returns to market having lost a quarter of a year, with their best window gone and a story to explain to the next buyer.
We have watched this from the buy side more than once. The seller works through the diligence requests while trying to keep the business running, and then ninety days in, after two LOI extensions, the buyer walks because the financials did not come back the way they were presented. The seller has spent a full quarter under exclusivity with the one party who was always going to derail the deal.
The financials are the most common cause. Not fraud, usually, but the ordinary bookkeeping habits of an owner-managed business meeting a buyer’s underwriting for the first time.
Sellers: the fix is doing your diligence before you sign, not after
The single highest-return move available to a seller is to run their own Quality of Earnings before going to market rather than reacting to the buyer’s.
Starting after the LOI is signed is close to pointless as a protective measure. By then you are already sixty or ninety days into the clock, and it is the same moment the buyer’s own advisors begin theirs. The work only helps if you have done it before you go to market.
Doing it early changes the process in three ways:
It widens the buyer pool.
A marketing document that says the earnings have been independently validated makes buyers materially less hesitant to put an offer in.
It collapses the question load.
Instead of fielding a hundred and fifty financial questions one at a time, you hand over a report.
It surfaces problems while you can still fix them.
We have run pre-market work where the numbers came back soft enough that the owner chose not to sell yet, and instead went and fixed the issues first. That is a better outcome than discovering it under exclusivity with a buyer who holds every card.
Buyers: what to nail down before you sign
| Term | Why it matters |
|---|---|
| Exclusivity length | Long enough to finish diligence, short enough to keep the seller motivated |
| Earnings basis | Whether price is struck on SDE or EBITDA, and whose adjustments count |
| Working capital | Say that a net working capital peg will be set, so it is not a fight later |
| Diligence access | Named contacts, systems access, and a response commitment |
| Extension mechanics | What happens if diligence runs long, and who decides |
| Cash-free debt-free | State the basis explicitly rather than assuming it |
The earnings basis is the one buyers most often leave vague. If the seller marketed on one measure and you underwrote on another, you are negotiating over two different numbers and neither of you has noticed yet.
When a QoE is effectively expected
Some sectors draw diligence scrutiny almost automatically. Construction is the clearest case, because of how progress billing and work in progress are recorded, and trucking is close behind. In those industries a buyer will nearly always commission a report, which is a strong argument for a seller getting there first.
Frequently asked questions
Is a letter of intent binding?
Partly. Price and structure are typically non-binding, but exclusivity, confidentiality and cost provisions usually are. Read those clauses closely, because they are the ones that will actually govern your next three months.
How long should exclusivity run?
Commonly 60 to 90 days for a lower-middle-market deal. Sellers should push for the shorter end and for extensions to require something in return. Buyers need enough runway to complete diligence, which depends heavily on how clean the target’s records are.
Should I get a Quality of Earnings before or after the LOI?
Buyers, after, because that is when you have exclusivity and access. Sellers, before, and well before. Those two answers are different on purpose: the buyer is protecting a decision, the seller is protecting a process.
Can the price change after the LOI?
Yes, and this is the normal path to a retrade. If diligence finds that earnings do not support the offer, the buyer reopens price while the seller is still locked in exclusivity. That is precisely the position pre-market diligence is meant to keep you out of.
What happens if diligence finds a problem?
It depends on scale. Small, explainable variances usually get absorbed. Larger ones lead to a price adjustment, an escrow holdback, or a restructured earnout. Genuinely material findings end deals. The tested add-backs behind that judgment are covered in EBITDA normalization adjustments.
Where to next
If you are about to sign an LOI on either side of a deal, the earnings basis and the exclusivity clock are worth an hour of scrutiny before signature rather than after. Our transaction advisory services team works inside that window continuously. Sellers should start with sell-side advisory; buyers with buy-side due diligence. To talk through timing on a live deal, email Avnit Sekhon at avnit.sekhon@treewalk.com.
