How do you evaluate a Letter of Intent for your business?
Receiving unsolicited interest in buying your company can be both thrilling and overwhelming. After discussions, meeting the buyer, sharing financials and receiving a formal Letter of Intent (LOI), the critical question is whether the LOI is a fair bid. An LOI is a non-binding document outlining proposed terms — purchase price, deal structure (cash, stock or earn-outs), timelines and contingencies. Because the buyer most likely acquires businesses regularly while you sell only once, professional support is essential. Seven steps help you assess fairness.
1. Assess the valuation — engage M&A advisors or investment bankers; compare the offered EBITDA multiple to industry standards (for example, 5x to 7x versus a 3x offer), use discounted cash flow for predictable revenue, and account for asset-based and intangible value
2. Evaluate the deal structure — calculate the present value of all consideration: cash (least risk), stock (assess liquidity and volatility), earn-outs (performance risk, valued by DCF) and deferred payments (discounted for time value); review contingencies, holdbacks and tax implications
3. Gauge strategic fit and buyer intent — understand the buyer's motives, verify their financial capacity with proof of funds, and review non-financial terms like non-competes, employment agreements and brand plans
4. Compare to market conditions — weigh industry demand, discreetly solicit competing offers, and factor in interest rates and the broader economy
5. Seek expert advice — assemble M&A advisors, an accountant for tax and financials, and an attorney for legal terms
6. Trust your instincts — be cautious of pressure to sign quickly, vague terms or unclear plans
7. Negotiate with professional support — let your advisors counter on price, multiple, payment terms and contingencies, preserving goodwill for the post-sale working relationship
Key facts: evaluating a Letter of Intent
An LOI is a non-binding outline of price, structure, timelines and contingencies
Benchmark the EBITDA multiple against comparable sales and value intangibles and assets
Assess the present value of all consideration: cash, stock, earn-outs and deferred payments
Solicit competing offers and let M&A advisors negotiate to protect value and your future relationship
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Disclaimer: This article is for general informational purposes only and does not constitute legal, tax or financial advice. Consult qualified advisors regarding your specific circumstances.
