April 10, 2025
Letters of Intent: Considerations for Sellers
I’m on record as not being a fan of letters of intent. That being said, a lot of clients are, and every deal lawyer needs to know their way around the barrel full of issues associated with them. This recent Mintz memo provides an overview of some of the key issues that sellers should have a full understanding of before signing up for a letter of intent. This excerpt addresses purchase price adjustments:
In US M&A the standard is for businesses to be purchased on a cash free, debt-free basis and delivered with a normalized level of working capital. It is common for LOIs to simply leave it there; however, sellers should evaluate if it is favorable to have a bespoke calculation of working capital (i.e. specifically including or excluding certain items) and/or separate credits or adjustments to the purchase price for other items such as tax assets.
Additionally, sellers should evaluate if a working capital collar (i.e. a band surrounding the working capital target where no adjustment up or down is made) is appropriate to avoid nickel and diming in the ultimate working capital adjustment. Addressing these points at the LOI stage is more likely to yield a positive result for the sellers as the buyer is more likely to make concessions at this point in order to secure the deal and get the sellers to sign the LOI and agree to exclusivity.
Other topics include indemnification & RWI, earnout considerations, equity rollover arrangements, and exclusivity and other binding provisions of the LOI. If you’re looking for more resources on letters of intent, be sure to check out our “Letters of Intent” Practice Area and the discussion beginning on page 120 of the Practical M&A Treatise.
– John Jenkins