For most founders, the receipt of a Letter of Intent (LOI) feels like the finish line. In reality, it is the beginning of the most dangerous phase of the transaction. A sophisticated buyer uses the LOI to “lock you up” in an exclusivity period, often while leaving themselves several backdoors to “re-trade” (lower) the price during due diligence.
At David Mayfair, we view the LOI not as a handshake, but as a blueprint. If the architecture is weak, the deal will collapse under the weight of the next 90 days. Here is how we ensure an LOI is a binding commitment to value, not just a fishing license for the buyer.
The Exclusivity Trap (The “No-Shop” Clause)
The most powerful weapon in a buyer’s arsenal is the Exclusivity Period. Once you sign an LOI, you are legally barred from talking to other suitors—usually for 60 to 90 days.
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The Risk: The buyer now has leverage. They know you’ve told your spouse, your lawyers, and perhaps your inner circle that the company is sold. If they find a minor “hair” on the business in month two, they may drop the price, betting that you are too emotionally committed to walk away and start over.
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The Mayfair Strategy: We negotiate for shorter exclusivity windows (45 days) with “performance milestones.” If the buyer hasn’t completed their Quality of Earnings (QofE) by day 30, the exclusivity expires. This keeps the pressure on the buyer to close.
Defining the “Working Capital Peg”
One of the most common ways a deal “leaks” value at the closing table is through the Working Capital Peg. An LOI might offer $20M, but it assumes the business comes with a “normal” amount of cash, inventory, and receivables to operate.
If the LOI doesn’t explicitly define what “normal” means, the buyer can argue on the eve of closing that you need to leave an extra $500k in the operating account. That is a dollar-for-dollar reduction in your walk-away proceeds. We insist on defining the “Peg” based on a 12-month rolling average before the LOI is even signed.
The “Sellers Notes” and Earn-Out Clarity
If a buyer offers $25M but $10M of it is a Seller Note (where you are effectively lending the buyer money to buy your own company), the deal is not worth $25M. It is a $15M deal with a high-risk debt instrument attached.
We scrutinize the “subordination” of these notes. If the buyer defaults on their bank loan, do you still get paid? In a winning LOI, the terms of the earn-out must be linked to metrics you can control—ideally Gross Revenue, not Net Income, which the new owner can easily suppress through aggressive corporate overhead allocations.
The “Binding” vs. “Non-Binding” Paradox
While the purchase price in an LOI is technically non-binding, certain sections must be binding to protect the seller:
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Confidentiality: Strict penalties if the buyer leaks the news to your competitors or employees.
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Break-up Fees: If the buyer walks away for a non-material reason, they should compensate you for the time and legal fees wasted.
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Governing Law: Ensuring any disputes are settled in a jurisdiction favorable to the seller.
