The Letter of Intent (LOI) is the most important document in a business sale that isn't legally binding. It sets the deal's economic and structural terms, governs exclusivity, and frames the diligence that follows. This guide walks through how California business owners should approach LOI negotiation.
What goes in an LOI
Purchase price, deal structure (asset vs. stock), payment terms (cash at close, seller note, earn-out), exclusivity period (typically 30–90 days), expense responsibility, working capital target, employment/transition arrangements, lease and license-transfer expectations, definitive-agreement timeline, and confidentiality.
What's binding vs. not binding
Most LOI economic terms are non-binding 'subject to definitive agreement.' But specific provisions ARE typically binding: exclusivity (no-shop), confidentiality, expense responsibility, and choice of law. Sellers should review carefully before signing.
Negotiating exclusivity
Buyers typically request 60–90 days of exclusivity. Sellers should negotiate down to 30–45 days where possible, with extension only if buyer hits diligence milestones. Including a 'shotgun' provision — automatic exclusivity termination if buyer materially changes terms — protects sellers from re-trade.
Working capital target
California asset deals typically include a 'normalized working capital target' the seller delivers at close. The LOI should specify the target (often based on TTM average), the calculation method, and the post-close adjustment process. Vague working capital language is the #1 source of post-LOI re-trade.
Earn-out structure
Earn-outs are common in California middle-market deals. The LOI should specify metric (revenue, EBITDA, customer retention), measurement period, payment cap, calculation methodology, audit rights, and the post-close governance affecting earn-out outcomes.
Common California-specific LOI provisions
Lease assignment cooperation, ABC license transfer (for restaurants/bars), C-license transfer (for trades), employment transition (post-Dynamex/AB-5 considerations), tax allocation (Section 1060 for asset deals), and bulk sale notice compliance.
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