In the current market, Private equity (PE) firms are increasingly reaching out directly to firm owners, often with heavily contingent (“earnout“) offers and a sense of urgency. Most aim to negotiate a Letter of Intent (LOI) quickly to gain exclusivity, leaving the seller without competitive backup offers. Without a firm stance, an LOI leaves room to renegotiate a deal until closing, netting the seller with a less favorable offer than originally understood.
A strategic sale isn’t about finding a few buyers, it’s about finding the right buyer in a competitive environment with the right terms.
Deals can get delayed, derailed, and collapsed due to the unintended consequences of using poorly structured LOIs. Many buyers aim to tie up the practice to limit a competitive sales process. They’re hoping you won’t test the market. Some Corporate buyers issue LOI’s knowing that only a small percentage will close. This is not true of all PE buyers of course, but it is a negotiating tactic we now know is fairly commonplace.
It is not an uncommon practice in the sale or acquisition of any business to begin negotiations with a Letter of Intent. On the surface, this might seem like a smart way to get both parties on the same page early. It documents an initial understanding, demonstrates buyer interest, and outlines general deal terms. However, in our experience, relying too heavily on an LOI often creates more problems than it solves.
We recommend moving directly to a well-crafted purchase agreement or ensuring there is a hard and fast deadline without exclusivity for moving to a purchase agreement from an LOI.
Pitfall #1: It’s Not a Binding Commitment But It Still Changes the Dynamic
Most LOIs are non-binding, aside from possible exclusivity clauses. While this means they’re technically not enforceable contracts, they still influence seller behavior in significant ways. Sellers often stop talking to other interested buyers, mistakenly believing the deal is essentially locked in. This creates risk. If the LOI falls through, a better-suited buyer may have already moved on, and valuable time and momentum can be lost.
Off market buyers in particular, often use LOIs as a foot in the door. The goal may not be to close a deal quickly but rather to slow things down in order to negotiate the best terms for themselves. The initial terms may not be transparent. They might start layering in complications like earnouts, seller financing, or performance-based payouts as you work towards a purchase agreement. While these offers may seem attractive at first glance (and often come with appealing top-line numbers), the fine print can introduce risk, uncertainty, and complexity you weren’t bargaining for. In many cases, a simpler, more transparent offer from a traditional buyer might deliver more value with less stress, or having Private Equity move to contract initially or swiftly could do the same. We have found that some buyers will often try to negotiate several LOI’s with different firms simultaneously in order to hedge their bets that some of the transactions will close.
LOI Pitfall #2: It Glosses Over the Details
While an LOI might outline the “big picture,” they rarely include the nuanced terms that actually matter. Critical elements such as payment structure, transition planning, compensation, contingencies, and timelines are often absent. This can potentially invite misunderstanding, mistrust, and misalignment down the road. If you are employed with the buyer after close, this misalignment complicates the future success of the firm.
It is not uncommon for a purchase agreement to differ drastically from the originally executed LOI. When this happens, it can feel like a bait-and-switch, damaging the relationship between buyer and seller. Buyers may initially offer high valuations in an LOI, only to revise their offers later based on detailed due diligence. Another tactic they might employ would be to tie a significant portion of the payout to future performance. That might work for some sellers, but it’s important to understand what you’re truly signing up for in order to decide what is best for you. It’s important to know these details before you commit to one buyer.
LOI Pitfall #3: Lawyers and Complexity Can Derail Momentum
When you leave too much up to the lawyers after an LOI is signed, and too much time, you are leaving room for complications. We have seen relatively simple accounting practice transactions balloon into 100+ page purchase agreements. That’s unnecessary and, frankly, unacceptable.
Complexity is not a sign of sophistication. It is often the result of unclear goals, fear, or overreliance on tradition. Some lawyers are incentivized to add complexity in order to extend negotiations to meet billable hour requirements of their firms. Not to mention that once the LOI is signed, the time pressure to finalize the terms evaporates. The longer the process drags on, the more likely it is for deal fatigue to set in, leading to cold feet, bruised relationships, and higher costs in the long run.
As we often say, simplicity is one of the most undervalued aspects of M&A work. It takes discipline to stay simple, but that’s where the real value is.
So, Why Are LOIs Still Used?
There are a few common reasons people cling to the LOI:
- Habbit: “This is just how deals are done.” But tradition is not a strategy.
- Fear: Sellers worry they will scare buyers away by asking for a purchase agreement first or demanding it too soon.
- FOMO: Buyers want to “lock down” a firm quickly, even if they haven’t done full due diligence.
- Lawyers: Many firms encourage billable hours, and longer negotiations mean more billing.
The buyers who often lead with an LOI do so in order to solidify their options, not to quickly close a deal. They know it can “pause the market” and get sellers emotionally committed to a deal before key terms are negotiated. It is important to bear this in mind when considering an LOI from any buyer.
A Better Path: Skip the LOI and Keep It Simple
Here’s how we recommend handling it instead:
- Don’t Use an LOI: Instead, go straight to a purchase agreement that includes reasonable contingencies for due diligence and financing. This filters out unmotivated buyers and accelerates progress with serious ones.
- Set Tight Deadlines: If an LOI must be used, give it a short expiration (one to two weeks at the most) and stick to it. Otherwise, time will slip away, and deal momentum along with it.
- Fall Out Fast if Needed: If there are deal-breakers, bring them up early. Don’t drag out misaligned conversations. Smooth deals come from alignment and transparency, not from forcing a bad fit.
The Bottom Line
The sale or purchase of an accounting practice does not have to be complex. When the buyer is a good fit and the terms are clear, these deals can be straightforward.
In our view, skipping the LOI is often the smartest move you can make.
A complex offer is not always a better one, especially if it is tied up in earnouts, delays, and contingencies that reduce your certainty of collecting. If you remember just one takeaway: Keep it simple. Clear, straightforward agreements close deals and preserve relationships.
If you are getting off-market offers, imagine the quantity and quality of offers you could get if you went to market.
Want to dive deeper into the topic, Download our Pitfalls of the LOI white paper.
P.S. Here are four other ways we can help you:
- Book an exit strategy call
- Download our Private Equity White paper
- Watch our Seller’s Strategic Guide to Selling an Accounting Firm
- Read our Seller’s Guide to Evaluating Buyers
