LOI best practices:
• Include baseline financials for the target company and explicitly state that your valuation is based on this baseline.
• Include a net working capital peg, a specific dollar amount, typically based on the average of the last twelve months.
• Include a provision which allows you to extend the LOI by 30 days under reasonable circumstances.
• Make it specific and meaty. An IOI can be one page, but an LOI should be longer. This is your chance to prevent any ambiguities or surprises before the purchase documents.
• Be specific about what representations and warranties will be expected.
• Show the valuation and deal structure on page 1. This is the first thing the seller will be looking for when opening the PDF.
• For seller notes and earn-outs, include a table or exhibit to show exactly when and how they will be paid. Also state they will be subordinate to any senior debt and credit lines.
• Yes, AI can give you a good first draft. Someone else should review it (quick job). • Yes, you can generally reuse a good LOI for every deal, just swap names and numbers.
• Include the non-compete provision (duration, scope, geography).
• Require signatures from all shareholders and maybe even from the spouse if there’s a non-zero chance they’ll obstruct later.
