In the lower middle market — typically deals between $10 million and $100 million — the letter of intent (LOI) serves as a pivotal document that sets the tone for the transaction, shapes the seller’s expectations, and determines whether a buyer wins the right to exclusive negotiations. For buyers, the challenge is balancing precision and competitiveness with sufficient flexibility to preserve deal optionality during diligence.
Below are key strategies and technical considerations for presenting a compelling LOI. Note that the buyer’s approach should generally be calibrated depending on the context in which LOIs are being drafted. For instance, if there is a competitive auction process, then bidders should take care to draft their LOIs based on what is required in the bid letter or instructions and may want to tailor their approach on certain terms, depending on the level of competitiveness.
For sellers, however, the LOI represents an opportunity to flesh out all material terms before entering into exclusivity. Sellers should prioritize a maximum degree of price and closing certainty, along with any terms involving key employees.
Lead With Clear, Seller-Centric Economics
- Provide an unambiguous headline purchase price, breaking out cash at close, escrow, holdbacks, earnouts, rollover equity, and any contingent consideration.
- Contextualize your offer with reference to market norms and benchmarks (e.g., revenue or EBITDA multiples), particularly if you expect the seller to socialize the LOI with stakeholders or advisers. Consider also keying the headline purchase price to core assumptions that underpin the valuation.
- If relevant, outline proposed purchase price adjustments (e.g., working capital peg, cash-free/debt-free basis) in a manner that signals commercial fairness.
Address Structural, Tax and Financing Considerations Up Front
- Clearly articulate the transaction structure (equity vs. asset vs. merger) and the rationale behind it, considering tax efficiency, regulatory concerns, or liability containment.
- Address seller-specific tax sensitivities early — e.g., 338(h)(10) elections, rollover equity treatment, or installment sale mechanics — to demonstrate technical credibility.
- Confirm whether the deal will be financed with committed capital or third-party debt, and, if the latter, explain steps needed for securing financing and anticipated timing.
Calibrate Closing Conditions and Contingencies
- Keep closing conditions focused on essential regulatory approvals, confirmatory diligence, and material contracts or consents.
- Avoid sweeping “subject to diligence” qualifiers or overly broad financing outs, which can erode credibility with sellers and their counsel.
- Where possible, preempt key diligence areas of concern (e.g., environmental, intellectual property, cyber, labor) and explain how you plan to manage them without derailing the process.
Articulate the Post-Closing Strategy and Governance Approach
- Recognize that many founder- or family-owned sellers in this segment care deeply about legacy, employees, and post-closing integration. The LOI should reflect this by thoughtfully addressing these areas — for example, by including non-binding language around maintaining the brand identity, committing to employee retention where appropriate, or outlining a collaborative integration process. Even if not legally binding, these signals of intent can be crucial in differentiating the buyer from others-.
- Where appropriate, address management retention, incentive arrangements, and board or governance structures. In transactions involving workforce-heavy businesses — such as services, healthcare, logistics, or certain manufacturing sectors — the company's value is closely tied to its employees. Retention, morale, compensation structures, and culture are often critical to the ongoing performance and scalability of the business post-closing. The LOI can include non-binding language affirming the buyer’s intention to honor existing employment relationships, maintain key benefits for a period of time, or involve current leadership in integration planning.
- For deals involving rollover equity, provide a high-level summary of governance rights, drag/tag mechanics, and exit horizon.
Address Risk Allocation and Deal Protections Thoughtfully
- Indicate whether you intend to use representations and warranties insurance (RWI) and the extent to which it will backstop, or act as a substitute for, indemnification obligations.
- Outline key indemnity terms — such as caps, baskets, or survival periods — but avoid over-lawyering the LOI at this stage.
- If applicable, explain how you will approach non-compete, non-solicit, and other restrictive covenants in the definitive documentation.
Demonstrate Process Credibility and Execution Speed
- Specify a realistic but efficient diligence and negotiation timeline, including key milestones (such as diligence kickoff, first draft of definitive agreement, and expected signing/closing).
- Identify your deal team, counsel, and advisers, and highlight prior relevant deal experience to bolster execution credibility.
In the lower middle market, an LOI is not merely a term sheet — it is a signaling document that reflects the buyer’s sophistication, deal readiness, and respect for the seller’s priorities. Buyers who combine commercial competitiveness with technical precision, credible risk allocation, and thoughtful structuring are best positioned to win exclusivity and drive successful outcomes.
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