How to Compare LOIs When Selling a Business: Why the Highest Offer May Not Be the Best

Quick answers:

Is the highest offer always the best offer when selling a business?

No. A higher headline value may include less cash at closing, more contingent consideration, greater financing uncertainty, aggressive working-capital assumptions, or extensive post-closing obligations. The strongest offer provides an acceptable combination of economics, closing certainty, retained risk, and alignment with the seller’s objectives.

What terms should a seller compare in an LOI?

Compare the purchase-price definition, transaction form, cash at closing, financing and approvals, contingencies, diligence requirements, working capital, deferred consideration, exclusivity, closing timeline, and post-closing obligations.

How important is cash at closing?

Cash paid directly to the seller at closing is generally the most certain component of an offer. Seller notes, earnouts, escrows, and rollover equity may add value, but each introduces collection, performance, timing, claim, or investment risk.

Can the purchase price change after an LOI is signed?

Yes. The final price and proceeds may change because of financial diligence, working-capital calculations, debt-like items, legal findings, customer concentration, changes in performance, or other matters identified before closing.

Is a letter of intent binding?

Many LOIs combine nonbinding transaction terms with binding provisions such as confidentiality and exclusivity. The American Bar Association describes this mixed structure, but the specific language and applicable law matter. Qualified transaction counsel should review the LOI before it is signed.

Why the highest LOI may not produce the best closing?

A business owner receiving multiple offers may naturally rank them by the first number shown. That is understandable, but the headline number may describe enterprise value rather than what the seller receives. It may also depend on financing, an earnout, a seller note, rollover equity, working-capital assumptions, or unresolved diligence.

Consider a $10 million offer that provides $6.5 million directly to the seller at closing and places the balance into a seller note, earnout, and rollover investment. A $9.2 million offer may provide more immediate liquidity, fewer conditions, and a shorter path to closing. Either offer could be appropriate. The decision depends on the probability, timing, and risk attached to each component and on what the owner needs the sale to accomplish.

Before signing an LOI and granting exclusivity, the seller should evaluate the economics, the buyer’s ability to close, the risk retained after closing, and the fit with the owner’s personal and financial objectives.

The four-part LOI comparison test

A useful comparison begins by separating four questions that are often blended together.

Define your personal exit objectives before ranking offers

There is no universally superior deal structure. One seller may prioritize maximum liquidity because the proceeds will fund retirement. Another may accept rollover equity because the owner wants to participate in future growth. A third may care deeply about employee continuity, a short transition period, or closing by a specific date.

Before comparing LOIs, the seller and advisory team should define:

• minimum acceptable cash paid directly to the seller at closing
• acceptable closing timeline and exclusivity period
• willingness to accept seller financing or an earnout
• interest in retaining equity after the transaction
• acceptable post-closing involvement and responsibility
• employee, customer, and legacy considerations
• tolerance for financing, collection, and performance risk
• tax and wealth-planning objectives

Without these priorities, the offers are being compared only against one another. A useful decision compares each offer against the outcome the seller actually wants.

Nine terms to compare before choosing an LOI

1. Purchase price definition

The first task is to determine what the stated purchase price represents. An LOI may describe enterprise value, equity value, or a purchase price subject to cash, debt, working capital, transaction expenses, and other adjustments. Two buyers may present similar numbers while using materially different assumptions.

The seller should determine:

• whether the offer is stated on a cash-free, debt-free basis
• which liabilities the buyer considers debt-like
• whether receivables, inventory, real estate, or other assets are included
• how transaction expenses will be handled
• whether the price assumes a specific working-capital target
• what portion of the stated value is fixed, deferred, contingent, or reinvested

Until those definitions are clear, the headline numbers are not directly comparable.

2. Transaction form and tax structure

The LOI should identify whether the buyer proposes an asset purchase, equity purchase, merger, or another structure. Two offers with the same stated value can produce different tax consequences, liability treatment, consent requirements, and administrative complexity.

The parties should clarify which assets and liabilities transfer, whether material contracts, licenses, leases, and permits require consent, and which tax or purchase-price-allocation assumptions remain open. The seller’s attorney and tax advisor should evaluate the actual consequences before the seller treats two structures as economically equivalent.

3. Cash at closing and expected seller proceeds

Cash funded at closing is not necessarily cash delivered to the seller, and neither figure is the same as net proceeds. Debt repayment, transaction expenses, escrows, holdbacks, taxes, and purchase-price adjustments can reduce the seller’s immediate liquidity.

For each offer, separate:

• gross funds provided by the buyer at closing
• cash paid directly to the seller
• funds deposited into escrow or otherwise withheld
• debt and debt-like items expected to be repaid
• transaction expenses and estimated closing adjustments
• amounts deferred, contingent, or reinvested

Lion’s article Deal Structure: Why the Headline Price Rarely Tells the Whole Story provides a broader explanation of how cash, seller financing, earnouts, rollover equity, and tax considerations affect the seller’s economic outcome.

4. Financing and funding certainty

An LOI demonstrates interest. It does not necessarily demonstrate that the buyer can fund the transaction. The buyer may still require acquisition financing, investor commitments, investment-committee approval, SBA approval, or additional equity partners.

The seller should ask:

• What are the buyer’s proposed sources of debt and equity?
• How much equity will the buyer contribute?
• Has a lender reviewed the company and proposed structure?
• Are investor, board, or investment-committee approvals still outstanding?
• Who has final authority to approve the acquisition?
• What evidence supports the buyer’s financial capacity?
• Has the buyer closed comparable transactions?

If SBA financing is contemplated, the seller should also understand whether the proposed structure and diligence timeline are realistic under the current rules. Lion’s SBA SOP 50 10 8.1 article explains the seller-facing implications of the updated acquisition-lending procedures.

5. Contingencies and diligence

Most transactions involve conditions that must be satisfied before closing. The issue is not whether contingencies exist, but how broad they are, whether they address legitimate unresolved matters, and how much discretion they give the buyer.

Common conditions include:

• satisfactory financial, legal, tax, and operational diligence
• financing approval
• quality-of-earnings findings
• customer, vendor, landlord, or regulatory consents
• employment agreements with key personnel
• board or investment-committee approval
• no material adverse change in the business

A broad condition may allow the buyer to delay, renegotiate, or terminate. The seller should distinguish unavoidable closing requirements from issues the buyer could reasonably investigate or resolve before exclusivity begins.

6. Working capital and closing adjustments

Working capital can materially change the seller’s final proceeds even when the headline purchase price does not change. Many transactions require the business to deliver a normalized level of operating working capital at closing.

The LOI should address the basic methodology, including:

• which accounts are included or excluded
• the historical period used to calculate the target
• the treatment of seasonality, growth, and unusual periods
• inventory reserves and receivable aging
• the classification of deposits, accrued expenses, and other disputed accounts
• whether excess working capital benefits the seller
• the process for resolving post-closing disputes

For a more detailed explanation, see Understanding the Working Capital Peg: Why It Can Change Your Final Proceeds.

7. Deferred and contingent consideration

Deferred consideration may bridge a valuation gap or allow the seller to participate in future performance. It also moves part of the offer into another category of risk.

Seller financing: A seller note creates credit risk. Compare the payment term, interest rate, security, subordination, guarantees, buyer capitalization, reporting rights, and remedies after default.

Earnouts: An earnout depends on a defined future result. Review the metric, measurement period, accounting rules, operating control, required investment, information rights, dispute process, and buyer obligations. A revenue-based earnout can be affected by pricing, customer allocation, acquisitions, or strategy. An EBITDA-based earnout also depends on expenses, allocations, and post-closing investment.

Rollover equity: Rollover equity is an investment rather than cash proceeds. Review the security class, governance rights, liquidation preferences, dilution protections, capital-call obligations, information rights, distribution policy, and path to liquidity.

Escrows and holdbacks: Compare the amount, purpose, duration, release conditions, claim procedures, and any seller exposure outside the escrow.

The comparison should show how much is being paid, when it may be received, what must occur before the seller keeps it, and who controls the conditions affecting payment.

8. Exclusivity and closing timeline

Most LOIs ask the seller to stop negotiating with other buyers for a defined period. Exclusivity allows the selected buyer to spend money on diligence, financing, and documentation without being displaced, but it also reduces the seller’s leverage.

Compare the length of the no-shop period, extension rights, termination triggers, financing milestones, diligence deadlines, purchase-agreement timing, and target closing date. A long exclusivity period without milestones may allow the buyer to determine whether it can close while competing buyers remain sidelined.

Lion’s article on competitive tension in M&A explains why the seller’s leverage often changes after one buyer is selected.

9. Retained risk and post closing obligations

Some offers require the seller to retain financial, operational, or investment exposure after closing. This may include an extended transition, employment or consulting duties, earnout responsibilities, seller-note exposure, indemnification obligations, escrows, restrictive covenants, guarantees, or rollover equity.

A retiring owner seeking a clean departure may value these obligations differently from an owner who wants to remain involved and participate in future growth. Compare the offer with the time, capital, restrictions, and risk the seller continues to carry.

LOI provisions that deserve clarification before exclusivity. The following provisions warrant closer review before a seller removes the company from the market:

• a purchase price without a clear bridge from enterprise value to expected seller proceeds
• working capital or debt-like items left entirely to post-LOI negotiation
• financing that has not been discussed with a lender or equity source
• an unresolved board, investor, or investment-committee approval
• broad diligence language that gives the buyer substantial subjective discretion
• a long exclusivity period without financing, diligence, or documentation milestones
• an earnout based on a metric the buyer can materially influence
• seller financing without meaningful information, security, or default protections
• rollover equity described by stated value without identifying the security and governing rights
• transition obligations that are not defined by time, responsibilities, authority, and compensation

These provisions are not automatically unacceptable. They are unresolved assumptions. The seller should understand and negotiate them while competitive leverage still exists.

Can the buyer actually close?

Buyer credibility is part of the offer. The strongest buyer is not always the largest organization or the one with the most polished presentation. It is the buyer whose capital, authority, experience, diligence plan, and expectations support a realistic closing process.

Relevant indicators include:

• demonstrated financial capacity and a credible funding plan
• experience closing comparable acquisitions
• clear internal decision-making authority
• a qualified legal and financial advisory team
• responsiveness and consistency during initial discussions
• a realistic understanding of the company, industry, and diligence required

A buyer that has not resolved basic funding or approval questions may use exclusivity to determine whether it can complete the transaction. That transfers part of the buyer’s execution risk to the seller.

A practical comparison of two offers: Consider a hypothetical business that receives two LOIs.

Offer A has the higher headline value and may provide more upside. It also exposes the seller to financing risk, collection risk, performance risk, private-company investment risk, and uncertainty concerning working capital.

Offer B has a lower headline value but delivers more cash directly to the seller at closing, uses fewer contingent components, and defines more of the transaction process. The $700,000 escrow remains subject to the negotiated claim and release provisions.

Offer B is not automatically superior. Offer A may fit a seller who believes in the company’s future, accepts the additional risk, and values potential upside. Offer B may fit a seller prioritizing liquidity, simplicity, and closing certainty. Both remain subject to debt payoff, transaction expenses, taxes, and final closing adjustments.

Use a weighted LOI scorecard

A scorecard can make tradeoffs visible without creating false mathematical precision.

Establish minimum requirements Identify the terms an offer must satisfy to remain viable, such as minimum cash at closing, maximum transition time, acceptable financing risk, or a required closing date. An offer that fails a critical requirement should not gain an artificial advantage from a higher headline value.

Weight the seller’s priorities Evaluate economics, cash at closing, financing certainty, contingencies, diligence burden, closing timeline, buyer credibility, deferred consideration, retained risk, and transition fit. The weighting should reflect the owner’s priorities rather than a generic formula.

Flag unresolved assumptions Separate unanswered questions from scored terms. An offer based on unverified funding, undefined working capital, or an optimistic earnout should not be treated as equivalent to one supported by clear information.

• Questions to answer before signing an LOI
• What exactly does the stated purchase price include?
• Is the buyer proposing an asset purchase, equity purchase, merger, or another structure?
• How much cash is expected to be paid directly to the seller at closing?
• What portion is deferred, contingent, escrowed, withheld, or reinvested?
• What debt, expenses, taxes, and adjustments may reduce seller proceeds?
• How will working capital and debt-like items be defined?
• What are the buyer’s sources of debt and equity?
• Which lender, investor, board, or committee approvals remain outstanding?
• What contingencies allow the buyer to terminate or renegotiate?
• What diligence will the buyer perform, and what information will it require?
• Is the closing timeline realistic for the financing and approvals required?
• How long will the seller be restricted by exclusivity, and what milestones apply?
• What will the seller be required to do after closing?
• What financial, legal, operational, or investment exposure will the seller retain?
• Does the offer support the seller’s personal, financial, and transition objectives?

Coordinate the advisory team before signing

Selecting an LOI is a commercial, legal, tax, and personal financial decision. The M&A advisor can compare economics, buyer credibility, process risk, and negotiating implications. Transaction counsel should review binding provisions, exclusivity, liability, enforceability, and the path to definitive documents. The seller’s CPA or tax advisor should model the tax consequences. A wealth advisor can evaluate whether anticipated proceeds and retained investments support the owner’s post-closing plans.

These reviews should occur before the seller grants exclusivity. Once competing buyers are sidelined, it may be more difficult to resolve vague economic terms or require the selected buyer to improve its offer.

Frequently asked questions:

What if I receive only one LOI?

A single LOI can still be evaluated against the company’s valuation range, credible buyer alternatives, minimum acceptable terms, financing reality, retained risk, and the seller’s objectives. The absence of competing LOIs makes independent benchmarking and clarification of unresolved terms more important.

How long should an LOI exclusivity period last?

There is no universal period. The appropriate length depends on financing, diligence, regulatory approvals, transaction complexity, and the buyer’s preparedness. Compare the total period, extension rights, termination triggers, and the milestones the buyer must meet to retain exclusivity.

Should financing be committed before an LOI is signed?

Not necessarily. Many lenders cannot issue a final commitment until they complete underwriting and diligence. The seller should still understand the proposed lender, financing structure, equity contribution, underwriting status, material conditions, and expected timeline before treating the financing as credible.

Does every term need to be finalized in the LOI?

No. An LOI is not a substitute for the definitive purchase agreement. The seller should, however, seek reasonable clarity on the economic assumptions and process terms that could materially change value, risk, timing, or negotiating leverage after exclusivity begins.

The practical takeaway

The seller’s objective is not merely to sign the highest LOI. It is to select the offer with acceptable economics, a credible buyer, defined assumptions, manageable retained risk, and a realistic path to the desired closing.

Before granting exclusivity, place each offer into the same comparison framework and identify what remains unverified. A lower headline value may create a stronger result when it provides more immediate liquidity and fewer conditions. A higher offer may be preferable when the additional risk is understood, supported, and consistent with the seller’s goals.

Owners who want a broader view of the sale process can review Lion’s seller representation process, including preparation, buyer qualification, offer analysis, diligence, and closing.

Educational notice This article provides general educational information and is not legal, accounting, tax, investment, or lending advice. Sellers should consult qualified advisors regarding their specific transaction and circumstances.