I recently completed three transactions where the Letters of Intent raised some particularly complex issues; enough to prompt me to take a fresh look at how I approach Letter of Intent (LOI) negotiations. While I’ve written about LOIs before, this post goes a level deeper. Think of it as “LOI 2.0.” We’ll get into some finer details here, because those are often what make or break a deal. Let’s get started.
When most founders receive an LOI, they go straight to the number at the top: the purchase price. I get it, it’s exciting! But here’s the hard truth: that number can be misleading. I was reminded of this again recently when one of my MSPs received 9 stellar offers for their company. They all appeared similar, but were they really?
Over the past few years, I’ve reviewed and negotiated dozens of LOIs for technology service providers with revenues ranging from $5M to $100M. While each buyer has their own style, I’ve noticed a consistent pattern: the most painful surprises sellers face often start with what’s not said or buried deep in the fine print. So, I thought I would share with you my common (12, in this case) hidden landmines I’ve uncovered in real-world LOIs, and how you and your attorney can defuse them before you commit to exclusivity.
1. Escrow & Indemnification Structures
It’s common for buyers to ask for 10% or more of the purchase price to be held in escrow/holdback for 18 to 24 months. What many sellers don’t realize is that this money, while technically still “yours,” is locked up (and at risk) long after closing. In some LOIs, I’ve seen minimal limits on what can trigger an indemnity claim, leaving sellers exposed. To protect yourself, cap the escrow at 5%-10% of the cash at close, push for a defined list of indemnifiable items, and consider (in larger transactions) using reps & warranties insurance to cover specific risks with shorter survival periods.
2. Working Capital “Normalization” Games
The phrase “normalized working capital” might sound harmless in an LOI, but without a detailed definition, it becomes a weapon during post-close adjustments. Some buyers strategically exclude deferred revenue or include prepaids and other one-time items to lower the working capital delivered at closing, which reduces your proceeds. I advise sellers to negotiate a clear methodology and peg early, typically based on a trailing 12-month average, and to explicitly state what’s included and excluded from the calculation. Normally, this would be difficult if you are an M&A advisor who doesn’t focus in this space, but if you specialize in MSPs, you should have a very solid idea of what will be a net working capital adjustment.
3. “Optional” Equity Rollovers That Aren’t Really Optional
You’ll often see LOIs say that rollover equity is “preferred” or “expected,” giving the impression that it’s optional. In practice, buyers will treat this as non-negotiable later. If you’re rolling part of your proceeds into the buyer’s entity, you need to know exactly what you’re getting: what class of shares, what your rights are, whether you have a voice in governance, and under what conditions you can cash out. So, make sure you have the PE firm explain this to you in detail before you sign the LOI. If the rollover is mandatory, push for minority protections and ensure your upside is tied to a clearly articulated exit strategy.
4. Management Fees That Drain Profit
Private equity-backed buyers often include a management or oversight fee charged to the company post-close; typically between 3% and 5% of revenue. That may not sound like much, but it can materially reduce EBITDA. If your earn-out is tied to EBITDA, this fee directly affects your payout. I’ve seen cases where these fees weren’t even disclosed until the purchase agreement stage. Sellers should demand full transparency and either negotiate these fees down or ensure they are excluded from any performance-based calculations, especially if an earn-out is involved.
5. Earn-Out Math That Doesn’t Add Up
Earn-outs can be valuable, but they can also be a mirage if the terms aren’t airtight. I’ve reviewed LOIs where earn-outs were based on vague measures like “adjusted EBITDA” with no further detail. Others had “cliff” structures, where missing the target by 1% meant losing the entire earn-out. If you’re accepting any portion of your payment as contingent, insist on a clear formula, define what you control post-close, and structure payouts to be linear (so hitting 80% of the goal still pays 80% of the earn-out). And if possible, try to negotiate an upside if you kill it on the numbers.
6. Exclusivity That Lasts Too Long
Once you sign an LOI, you typically enter an exclusivity period where you can’t negotiate with other buyers. That’s fair; buyers don’t want to invest time and money in diligence without a window of protection. But I routinely see 90- to 120-day exclusivity periods with automatic extensions, which can tie your hands if a buyer drags their feet or changes direction. I encourage sellers to negotiate 30- to 60-day windows, with milestone triggers (like delivery of a draft purchase agreement) and built-in off-ramps if momentum stalls. Absolutely pass on the automatic extensions. You can do that later if all is going well. For example, here is the best line I have ever seen written into an LOI by a sell-side attorney:
For purposes of this Letter of Intent, “Termination Date” means the date that is 60 days from execution of this Letter of Intent, provided, however, in the event BUYER either (a) fails to substantially complete its due diligence investigation and reaffirm the purchase price and other material terms and conditions set forth in this Letter of Intent in writing within [45] days from the date hereof or (b) fails to deliver an initial draft of the definitive purchase agreement within [60] days from the date hereof, SELLER may elect to terminate this Letter of Intent.
Feel free to pass this one along to your attorney!
7. No Exit Rights for Material Changes
Some buyers will present an attractive LOI upfront…only to materially alter valuation or structure midway through diligence. If your LOI doesn’t include language allowing you to walk away in those situations, you’re stuck in exclusivity without leverage. Every LOI should have a material change clause: if the buyer changes the economics, you should be able to terminate exclusivity and re-engage with other interested parties. Only the best attorneys look for this or add it. Make sure yours does.
8. Deferred Payments with No Teeth
Deferred payments such as seller notes or milestone bonuses are often unsecured in LOIs. That means if the buyer fails to perform, dissolves the entity, or just stops paying, you’re left with no recourse. I’ve seen seller notes with 5-year terms and no security interest at all, not to mention other horror stories told by advisors. If any portion of your deal is paid overtime, you should require a security interest, personal or parent guarantees, or at the very least, escrow funds to mitigate risk.
9. Misaligned Tax Structures
Sellers, especially C corporations, need to pay close attention to deal structure. I’ve seen LOIs where buyers default to an asset purchase without consideration for the seller’s tax consequences. For C corps, that can trigger double taxation: once at the corporate level and again when proceeds are distributed to shareholders. Don’t assume your CPA will “fix it later.” Get tax guidance before signing. Often, a structure like an F Reorganization or 338(h)(10) election can preserve deal economics while minimizing taxes. Also, as a side note, if you are in a state that allows PTET’s (Pass Through Entity Tax), and are contemplating an F Reorganization, be sure to consult with your tax advisor as you may not be able to use your existing entity for that payment (a little something I learned on my transaction.)
10. Buyer-Favorable Reps & Warranties
Reps and warranties rarely show up in detail in the LOI, but they matter – a lot. In follow-on agreements, some buyers attempt to include uncapped reps that last for years, sometimes including personal liability for founders. Sellers should insist that the LOI states their intent to limit reps to a defined list, capped at escrow, with survival periods of 12-18 months. Materiality and knowledge qualifiers are essential to avoid being held liable for immaterial or unknown issues. A good M&A attorney will be all over this, but I still wanted to point this out.
11. Governance Terms That Limit Your Voice
Rolling equity into a new entity can be lucrative, but only if you have visibility and protection. Too often, founders get 10%-20% equity but no rights: no board seat, no financial access, and no control over the next liquidity event. If you’re a minority shareholder post-close (which, frankly, is typical in most tuck-in or bolt-on transactions), request board observer status, access to financials, and tag-along rights to ensure your voice and value are preserved. At a minimum, if you have an earn-out, request (in writing) visibility to your own financials or profitability. Don’t assume they will give you this data; make sure it is in the LOI.
12. Undefined “Advisory” Roles
Finally, watch out for vague language about your post-close role. Buyers will sometimes insert a friendly line like, “Seller to remain involved in an advisory capacity.” But without a defined scope, timeline, or compensation, you could be working for free or staying involved longer than you want. Before you sign, clarify whether your role is full-time, part-time, paid, unpaid, and whether it ties into any non-compete period or rollover equity. And most importantly, if you have an earn-out, clarify whether your salary will be an EBITDA adjustment or not if you are only staying for a short transition period.
The Bottom Line
Buyers write LOIs to protect themselves. My job, and yours, is to make sure they don’t do it at your expense.
The time to negotiate is before you sign, when you still have the leverage. Once exclusivity begins, your leverage evaporates, and reversing bad terms becomes almost impossible.
Now, that is not to say there aren’t times where I will be silent – completely silent – on a topic so I can possibly negotiate a better term later, but that typically doesn’t apply to the key deal points.
If you’re reviewing an LOI (or expecting one soon), don’t go it alone. I’ve seen too many sellers give away control, cash, or optionality because they didn’t understand what was buried in the fine print. And just to make sure you don’t miss anything, I have created a quick one-page 12 LOI Landmines Cheat Sheet.
Stronger Numbers, Stronger Negotiation Power
One thing that can lead to more hidden landmines or less negotiating power? Unclear or unprepared financials. Buyers write LOIs to protect themselves, and if your numbers aren’t ready or don’t tell the full, credible story of your business, you risk leaving money on the table or agreeing to terms that aren’t in your favor.
That’s exactly why I created Getting Your Financials Ready for a Sale: a compact, foolproof online course built specifically for non-accountant IT business owners that will walk you through every step of getting your financials transaction-ready. In just a few short lessons, you’ll learn how to:
- Clean up your P&L and balance sheet so they stand up to buyer scrutiny
- Uncover hidden EBITDA add‑backs that can add 5–7 figures to your valuation
- Avoid the common mistakes that lead to worse terms, a stressful process, and less money in your pocket
Don’t let the fine print or your financials cost you when it matters most.
How Long Do Private Equity Firms Hold MSPs and Tech Service Providers