LOI Structure: Binding vs. Non-Binding Provisions
Most BSC transaction LOIs follow a standard architecture: the majority of substantive commercial terms (purchase price, structure, exclusivity) are non-binding — meaning neither party is legally committed to complete the transaction on those terms. A small number of provisions are binding: typically exclusivity, confidentiality, expense allocation, and governing law.
This distinction matters. If a seller receives an LOI and assumes every term is locked, they may be surprised when the buyer adjusts the purchase price by $300,000 during the due diligence period based on a QoE finding. The buyer's right to do so is nearly always preserved in the non-binding language of the LOI.
Purchase Price Mechanics
Total Consideration vs. Enterprise Value
The LOI will state either a total enterprise value (TEV) or a total consideration to seller figure. These are not the same. Enterprise value includes all forms of consideration — cash at close, seller note, earnout, assumed liabilities — while total consideration to seller typically refers to cash received by selling shareholders. Always clarify which figure is being communicated.
Cash-Free, Debt-Free Convention
Nearly all BSC acquisitions use a cash-free, debt-free purchase price convention: the stated price assumes the business is delivered with zero cash and zero interest-bearing debt at closing. If the business has $200,000 in cash at close, the seller keeps it. If there is $150,000 in a line of credit, the seller pays it off before close. The LOI should state this convention explicitly.
Working Capital Peg
Working capital adjustment is one of the most frequently contested provisions in BSC transactions. The mechanics: the LOI establishes a target working capital figure (typically a 3–6 month average of historical net current assets minus current liabilities). At close, actual working capital is measured. If actual working capital exceeds the peg, the seller receives additional consideration. If it is below the peg, the buyer receives a dollar-for-dollar reduction.
In BSC businesses, working capital disputes typically arise around:
- Accounts receivable aging — buyers exclude AR over 90 days; sellers want full AR included
- Prepaid contracts — seasonal prepayments may inflate current assets
- Accrued vacation liability — often not properly accrued on owner-operated P&Ls
| LOI Provision | Buyer-Favorable | Seller-Favorable | Market Standard |
|---|---|---|---|
| Exclusivity period | 90–120 days | 30–45 days | 45–60 days |
| Earnout period | 24–36 months | 12 months maximum | 12–18 months |
| Earnout metric | EBITDA (buyer controls costs) | Revenue retention | Revenue or gross margin |
| Seller note interest rate | AFR minimum (≈5%) | 6–8% with personal guarantee | 5.5–7% |
| Working capital peg | 5-month historical average | Minimal or fixed low amount | 3-month average |
| Non-compete scope | 5 years, 100-mile radius | 2 years, county-level | 3 years, 50-mile radius |
| Rep & warranty indemnity | Full rep indemnity, 3 years | Reps limited; R&W insurance | 18-month survival; 15% escrow |
Exclusivity: The Most Negotiated LOI Provision
Exclusivity — the period during which the seller agrees not to solicit or negotiate with other buyers — is the provision with the highest practical stakes in the LOI. Once signed, exclusivity effectively takes the business off the market. If the buyer uses the exclusivity period to re-trade the price (lower it based on due diligence findings), the seller has limited use.
Negotiating points:
- Sellers should insist on the shortest feasible exclusivity period — 45 days is typical for a well-organized seller with clean financial records.
- Exclusivity should be tied to the buyer's performance: if the buyer has not provided a list of open due diligence items within 15 days, exclusivity should automatically lapse.
- Material adverse change language should require objective thresholds, not subjective buyer discretion.
Earnout Design in BSC Transactions
Earnouts are most common in two scenarios: (1) the buyer and seller disagree on pro-forma EBITDA normalization, and (2) there is meaningful customer concentration risk. In both cases, the earnout allows the seller to "prove" the business performs as claimed.
| Metric | Measurement Ease | Seller Control | Dispute Risk | Best For |
|---|---|---|---|---|
| Revenue retention % | Easy | High | Low | Concentration risk |
| Gross revenue | Easy | Moderate | Low | Growth-focused deals |
| EBITDA | Complex | Low (buyer controls costs) | High | Rarely seller-favorable |
| Gross margin $ | Moderate | Moderate | Moderate | Reasonable compromise |
58%
of BSC earnout disputes are resolved in the buyer's favor when the metric is EBITDA; only 29% when the metric is revenue retention
Source: GF Data Deal Terms Study 2024
Post-LOI Checklist for Sellers
Once an LOI is signed and exclusivity begins, sellers should immediately:
-
Organize a data room. Every document the buyer will request — contracts, tax returns, insurance certificates, payroll records, equipment lists, licenses — should be assembled before exclusivity starts. Every day of delay is a day of your exclusivity period consumed.
-
Notify your accountant and attorney. The due diligence process involves document production that requires professional coordination. Do not manage this alone.
-
Resist re-trading. Buyers will frequently identify "issues" in due diligence and attempt to reduce the purchase price. Some adjustments are legitimate; others are negotiating tactics. Having an M&A advisor who understands BSC market norms is essential to evaluating buyer re-trade requests.
-
Maintain business performance. Nothing generates a price reduction faster than a significant contract loss or key employee departure during the exclusivity period. The business must continue to operate at LOI-performance levels.
Related: EBITDA Valuation Guide | Quality of Earnings Review | PE Due Diligence Checklist
Frequently Asked Questions
Is the price written into the LOI actually locked?
No. Purchase price, structure, and most commercial terms are non-binding. Typically only exclusivity, confidentiality, expense allocation, and governing law bind, which is exactly why a buyer can cut $300,000 off the price after a quality of earnings finding turns something up.
What does cash-free, debt-free mean for the check you actually receive at closing?
That phrasing means the stated price assumes the business is delivered with zero cash and zero interest-bearing debt. If $200,000 is sitting in the account at close, you keep it. If $150,000 is drawn on a line of credit, you pay it off first, before the price is settled.
How does the working capital peg work in practice?
The LOI sets a target, usually a three to six month average of historical net current assets minus current liabilities. Come in above it and you receive additional consideration; come in below and the buyer takes a dollar-for-dollar reduction. AR aging is where most of the fights happen.
Which provisions in the document can a seller actually be held to?
Only a short list carries legal weight: exclusivity, confidentiality, expense allocation, and governing law. Everything else, including the purchase price, the structure, and the rest of the commercial terms, is non-binding, so signing does not guarantee the headline number survives the buyer's diligence work.
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