A letter of intent locks in everything except the price

A first-time buyer signs a letter of intent believing they have bought something. They have. It is simply not the company, and it is not the price. What a signed LOI buys is a period of exclusive access to a seller's books, paid for with the only real leverage a buyer will ever hold.

I price private companies for a living, more than a thousand of them, and a large share of that work lands in the window between a signed LOI and a closing that may or may not happen. The pattern is consistent enough to predict. The number in the letter was set by what the seller asked. Diligence then contradicts it. And a buyer who never built a defensible range of their own has nothing to renegotiate from except awkwardness. Here is what the document actually binds, what happens to the price after signature, and how to set a number that survives its own diligence.

What the document actually binds

Read a typical letter of intent and almost every substantive term is expressly non-binding. The purchase price, the deal structure, the treatment of working capital, the escrow, the closing date: all of it is framed as the present intention of the parties, subject to diligence and to definitive documentation. The clauses that do bind are the short ones near the back. Confidentiality. Exclusivity, often called the no-shop. Allocation of expenses. Governing law. Sometimes a break fee.

That asymmetry is the entire document. The seller gives up the ability to run a process. The buyer gives up very little and states a price they remain free to revise. The LOI is not a contract to buy a business. It is a contract to stop shopping. Everything that happens after signature is a negotiation in which one side has voluntarily removed its own alternative.

None of this makes the letter a trap. It is a reasonable instrument, and no serious buyer will spend real money on diligence while a seller keeps taking calls. But it should be priced as what it is: the seller is selling exclusivity, and the currency is the buyer's number.

Exclusivity is the thing the seller actually sold you

Competitive tension is the single most reliable upward force on a private company's price, and exclusivity switches it off by agreement. The scale of what gets switched off is measurable. In the IBBA and M&A Source Market Pulse survey for Q2 2026, completed by 255 business brokers and M&A advisors, 87 percent of deals above $5 million drew at least three offers and 33 percent drew ten or more. Smaller deals under $500,000 more often saw only one or two.

So a seller who signs an exclusivity clause on a $5 million business is, on those numbers, switching off a market that was likely to produce at least two other bidders. That is a real concession, and a buyer who treats it as a formality is wasting the most expensive thing they will be given in the whole process. It also explains why sophisticated sellers push exclusivity as short as they can and attach conditions to any extension.

In my own experience the exclusivity window on lower middle market deals typically runs somewhere between one and three months, with extensions granted when both sides are visibly working. I am describing what I see rather than a published statistic, because no primary source I trust publishes a distribution of exclusivity lengths in this size band. Treat any specific figure you read on that question with suspicion, including mine.

The clock runs longer than first-time buyers plan for

Whatever the exclusivity clause says, the calendar is longer than most buyers model. The same Q2 2026 Market Pulse survey put median timelines from advisor engagement to close at six to ten months on Main Street and eleven to twelve months in the lower middle market. The $2 million to $5 million segment stretched from nine months to 11.5 months in a single reporting period.

Those figures cover the whole engagement rather than the post-LOI stretch alone, but the direction matters more than the decomposition: the part of the process that happens after a signature is not a formality, and it is getting longer, not shorter. A buyer who writes a thirty day exclusivity period into a letter and assumes a thirty day close is going to be asking for an extension, and asking for an extension is the weakest negotiating position available, because the seller now knows exactly how much the buyer has already spent.

What diligence does to the number

This is where the non-binding price stops being an abstraction. Axial's Dead Deal Report on 2025, which analysed 75 unsuccessful transactions across eight firm types and eight industries, breaks down why executed LOIs failed to close. Diligence findings outside the quality of earnings work were the single most common cause at 25.3 percent. Quality of earnings EBITDA discrepancies followed at 21.3 percent. Renegotiation challenges, meaning the two sides could not agree on a revised price or structure after those findings, accounted for another 14.7 percent.

Add those three together and 61.3 percent of broken LOIs in that sample died on something discovered after signature or on the failure to re-price once it was discovered. The remaining causes were seller decisions at 13.3 percent, financing constraints at 10.7 percent and business underperformance during the diligence period at 8.0 percent.

Read that distribution as a buyer and it says something specific. The dominant failure mode is not a financing market that closed, and it is not a seller who changed their mind. It is that the number in the letter was built on financial statements nobody had verified yet. A restated EBITDA restates the price automatically, and the renegotiation line is what happens when neither party prepared for that arithmetic in advance.

Read it as a seller and it says the mirror image. Six in ten broken deals traced back to what the books did or did not support. The cheapest hour a seller will ever spend is the one spent finding those problems before a buyer's accountant does.

The price keeps moving after you sign

Even in deals that close, the number in the LOI is rarely the number that changes hands, because a growing share of the consideration is made contingent. SRS Acquiom's 2026 Lower Middle-Market M&A Deals Report, drawn from more than 4,400 private-target transactions with closing payments of $50 million or less that closed through 2025, found earnouts in 29 percent of all lower middle market deals and in 35 percent of the smallest band up to $25 million. Private equity buyers were involved in 11 percent of lower middle market deals.

The company's broader 2026 Deal Terms Study, covering more than 2,300 private-target acquisitions worth $569 billion that closed between 2020 and 2025, found earnouts in 24 percent of 2025 deals, with the median earnout potential rising from 31 percent to 34 percent of the closing payment. Earnout periods skewed to one to two years, at 38 percent of deals, against 23 percent at a year or less and 20 percent at two to three years.

Put those two findings next to each other and the direction is clear: the smaller the deal, the more likely part of the price is contingent. So a headline number in an LOI on a sub-$25 million business has roughly a one in three chance of concealing a structure in which a material slice is not paid at closing at all. The counterweight is that cash at close remains high in this market. The Q2 2026 Market Pulse put it at 83 percent to 92 percent on average, with seller financing under 10 percent of most deals.

The practical reading for a buyer is that the headline multiple in a letter of intent is not comparable to anything unless the structure is stated alongside it. A 3.0x headline with a third of it sitting behind an earnout is not the same instrument as a 2.6x all cash, and a seller comparing two letters on headline alone is comparing the wrong number.

Anchoring on the ask is the expensive mistake

Where does the number in a first LOI usually come from? In practice, from the asking price, adjusted by however much the buyer felt able to push. That is the flaw, and it is measurable in my own data.

In the Felpel Private Company Index, built from 7,601 completed transactions with a usable enterprise value to SDE multiple, the median deal cleared at 2.67x, with the middle half of the sample landing between 2.0x and 3.4x. Across the 2,820 deals in that set that are verified sold and paired against their own listings, sellers asked 3.26x and buyers paid 2.58x. Starting from the ask means starting roughly two thirds of a turn above where comparable deals actually cleared.

One caveat I state every time: this index is an online and asset-light dataset with a marketplace lineage, and 98 percent of the multiple sample sits below $5 million of enterprise value. It is not a main-street brokerage sample and it is not a middle market sample. What transfers to other categories is the shape, meaning the existence and the rough width of a gap between asks and clears, not the specific level.

The dispersion matters more than the gap. A middle half running from 2.0x to 3.4x means that on $400,000 of earnings the defensible range is roughly $560,000 wide on identical reported numbers. A buyer who signs an LOI at a single point inside that band without knowing where the band is has not made a pricing decision. They have made a guess and then bought exclusivity to defend it.

How to price before you sign

The method is not complicated, and it fits on one page.

Start with a range and a sample size rather than a point. Write down the multiple band you believe the business sits in, the number of comparable transactions behind it, and the two or three specific attributes that move it within the band: owner dependence, revenue durability, customer concentration, and whether the earnings can be verified by someone who does not trust the seller. If you cannot name the sample, you do not have a comp set, you have an anecdote.

Then anchor on cleared prices rather than asks. Every marketplace figure a buyer sees is a listing figure, published by a party that earns money from listings. The 3.26x against 2.58x pair above is the size of that bias in one dataset, and no broker or marketplace has any reason to publish the equivalent for theirs.

Next, pre-commit the re-trade arithmetic. Before signing, decide what a given EBITDA restatement does to your price, and say so in the letter. A sentence stating that the price assumes a stated level of adjusted earnings and will be revised proportionally if verified earnings differ is not aggressive. It converts the 14.7 percent renegotiation failure category into a calculation both sides already agreed to, and it is far easier to write on day one than on day fifty.

Then buy the shortest exclusivity you can actually work inside, and tie any extension to specific deliverables from the seller rather than to the calendar. If the quality of earnings work cannot start because the data room is empty, the clock should not be running.

Finally, price the structure and not just the multiple. Given that roughly a third of the smallest lower middle market deals now carry an earnout, state the cash component, the contingent component and the measurement period as three separate numbers. A seller who understands all three is a seller who will not walk in month four.

The letter of intent is the cheapest document in the whole transaction and the most consequential. It is the moment a buyer converts optionality into commitment, and on the evidence above it is signed by most people with a number they cannot defend, against a seller who has just given up their alternatives. Do the pricing work before the signature, not after it. The signature is the point at which pricing work gets expensive.

Common questions

Is a letter of intent to buy a business legally binding?

Mostly not, and that is the point. In a standard LOI the commercial terms, meaning the purchase price, the structure, the working capital treatment, the escrow and the closing date, are expressly non-binding statements of intent subject to diligence and definitive documents. A short set of clauses is binding: confidentiality, exclusivity or the no-shop, allocation of expenses, governing law, and a break fee if one is included. The practical effect is that the seller is bound to stop taking other offers while the buyer remains free to revise the number. Read the binding section first, because it is the only part that creates an obligation on signature.

How long is the exclusivity period in an LOI?

In the lower middle market it usually runs somewhere between one and three months, with extensions granted when both sides are visibly making progress. That is my own observation from pricing work rather than a published distribution, and I have not found a primary source that publishes exclusivity lengths for this size band, so treat specific figures you see quoted online with care. What is measurable is that the close takes longer than buyers expect: the IBBA and M&A Source Market Pulse for Q2 2026 put engagement to close at six to ten months on Main Street and eleven to twelve months in the lower middle market.

Why do signed letters of intent fall apart?

Mostly on what diligence finds. Axial's Dead Deal Report on 2025, covering 75 unsuccessful transactions across eight firm types and eight industries, attributed 25.3 percent of broken LOIs to diligence findings outside the quality of earnings work and 21.3 percent to quality of earnings EBITDA discrepancies. A further 14.7 percent failed on renegotiation, meaning the parties could not agree a revised price after those findings. Seller decisions accounted for 13.3 percent, financing constraints 10.7 percent and business underperformance during diligence 8.0 percent. Taken together, roughly six in ten failures trace back to the number in the letter not surviving verification.

Should an LOI name a single price or a range?

Name a number, but derive it from a range you can show. A single point with no stated band behind it is indistinguishable from a guess, and it leaves you nothing to renegotiate from when diligence moves the earnings. In the Felpel Private Company Index the median of 7,601 completed transactions is 2.67x SDE while the middle half runs 2.0x to 3.4x, which on $400,000 of earnings is a spread of about $560,000 on identical reported numbers. Better still, write into the letter how the price adjusts if verified earnings differ from the figures it assumed, so the arithmetic is agreed before anyone is invested in the outcome.

Is the price in the LOI the amount the seller receives?

Often not, because part of it is contingent. SRS Acquiom's 2026 Lower Middle-Market M&A Deals Report, covering more than 4,400 private-target transactions with closing payments of $50 million or less, found earnouts in 29 percent of lower middle market deals and 35 percent of the smallest band up to $25 million. Its 2026 Deal Terms Study, across more than 2,300 acquisitions worth $569 billion closed between 2020 and 2025, found the median earnout potential at 34 percent of the closing payment, up from 31 percent. Cash at close is still high in this market, at 83 to 92 percent on average in the Q2 2026 Market Pulse, but a headline multiple means nothing until the cash and contingent components are stated separately.

Related reading

• Quality of earnings: the report that moves the price.
• What is SDE, and which add-backs actually survive.
• Is a business worth 3x profit? The honest answer is a range.
• How an independent sponsor prices a deal before the money exists.

Go deeper

If you are about to sign a letter of intent and you want the number stress-tested before exclusivity starts running, let's go through it together, or read more of how I think about pricing private companies.

Tomasz Felpel is an investor, founder, and advisor in private markets and healthcare, based in New York. He is a three-time founder of Value Alpha, an AI-powered private-markets valuation platform, Sonnerie VC, an early-stage healthcare venture firm, and Pond. Previously he led corporate development and M&A at Fortune 500 scale, pricing more than 1,000 private companies. Columbia Business School EMBA. Read the full story.