How Should Sellers Compare Letters of Intent with Different Deal Structures?

Start with a four-bucket comparison

Do not compare LOIs by looking only at the stated enterprise value or total consideration. Put every economic term into four separate buckets: cash at closing, contingent proceeds, retained investment, and execution conditions. This makes uncertainty visible instead of allowing a large but conditional number to dominate the discussion.

Cash at closing is the most immediate bucket, but even it may be subject to debt, cash, working-capital, transaction-expense, escrow, or indemnity adjustments. Contingent proceeds include earnouts, seller notes, installments, or other payments that arrive later. Retained investment includes buyer shares, rollover equity, or other consideration whose value depends on an asset you continue to hold. Execution conditions include diligence, financing, approvals, employment arrangements, exclusivity, and termination rights. An SEC-filed LOI illustrates how these categories can appear together in one proposed transaction, including cash, stock, working-capital adjustments, earnouts, a holdback, and conditions to closing. [1]

Measure cash at closing on a like-for-like basis

For each LOI, identify the amount that would be delivered at closing and the assumptions used to calculate it. Ask whether the figure is expressed as enterprise value, equity value, or a cash payment after debt and other deductions. These are not interchangeable. A headline amount may be reduced by indebtedness, unpaid transaction expenses, a working-capital adjustment, or an escrow and still be described as the purchase price.

If a working-capital adjustment is proposed, record the target, accounting principles, included accounts, excluded items, measurement date, and dispute process. The SEC-filed example defines current assets and liabilities for its adjustment and provides a cap on the adjustment. That is a useful reminder that the formula and definitions can matter as much as the target number. [1] Compare each LOI using the same illustrative closing assumptions, but label those assumptions clearly. Do not fill an unknown adjustment with a favorable estimate.

Also separate cash paid to the seller from cash that is merely retained in the business. A cash-free, debt-free formulation can produce a different result from an offer that leaves debt or working capital in place. Have advisers confirm how the proposed structure interacts with the specific assets, liabilities, and entity form involved.

Discount contingent proceeds for conditions, not just timing

An earnout is not the same as cash consideration. It depends on a future metric, a measurement period, a calculation method, and events that may be influenced by the buyer after closing. Compare the metric, threshold, payment curve, cap, timing, accounting rules, treatment of acquisitions or divestitures, and the buyer's operating covenants.

The American Bar Association's discussion of earnouts describes recurring disputes over payout calculations, buyer conduct, and the meaning of financial definitions. It emphasizes that precise language matters and that an ambiguity may lead to expensive proceedings rather than a predictable payment. [2] For each earnout, write a plain-language test: what must happen, who measures it, which records control, when the seller receives support, and what happens if the parties disagree.

Avoid assigning a probability to an earnout unless the assumptions are documented and the result is clearly labeled as a scenario, not a fact. A useful comparison can show the face amount, a conservative scenario, and an unresolved scenario without pretending to know the outcome. If the buyer controls pricing, staffing, accounting, customer allocation, or product investment, those control rights belong in the risk assessment.

Separate seller notes and installment payments from earnouts

A seller note or fixed installment obligation has different risks from an earnout. The amount and payment schedule may be fixed, but collection depends on the buyer's credit, security package, covenants, subordination, default remedies, and any required release or offset. Compare interest, maturity, amortization, collateral, guarantees, payment priority, and what happens if the buyer sells or restructures the business.

Tax treatment also requires separate analysis. IRS Publication 537 distinguishes an installment sale from a contingent payment sale and explains that a contingent payment sale can arise when the total selling price cannot be determined by the end of the tax year. It also discusses allocation when several business assets are sold together. [3] This is general federal guidance, not a conclusion about a particular seller's tax result. Ask a qualified tax adviser to review the entity, asset allocation, timing, and state or local issues before relying on a comparison.

In the comparison sheet, keep fixed deferred payments in their own row. Do not add them to a best-case earnout column or treat both as equivalent to closing cash. Their timing and collection risks are different.

Treat stock and rollover equity as retained exposure

Buyer stock, rollover equity, or another noncash instrument means the seller continues to hold investment exposure after closing. Compare the instrument, valuation date, pricing formula, transfer restrictions, registration or liquidity rights, voting rights, dilution protections, information rights, and the events that could reduce its value. If the consideration is public stock, distinguish the agreed reference price from the price at which the seller can actually sell.

The SEC-filed LOI used a volume-weighted average price formula for stock issued at closing and also proposed stock-based earnouts and a holdback. The example is not a template for another transaction, but it shows why the form, pricing reference, timing, and restrictions should be listed separately. [1] A seller comparing two offers should not label stock as cash merely because the LOI assigns it a dollar value.

Rollover equity adds governance and exit questions. Ask who controls future decisions, how future financing affects ownership, whether minority holders receive information, and how a later sale is approved. These points often require legal and financial modeling beyond the LOI headline.

Compare holdbacks, indemnities, and setoff rights

A holdback or escrow reduces the amount available immediately and may remain exposed to claims or post-closing adjustments. Compare the amount, form of property, release date, claim notice rules, control of the escrow, permitted offsets, and the process for resolving a disputed claim. A holdback in buyer stock creates both collection exposure and market-value exposure.

Read indemnity and setoff terms alongside the payment schedule. In the SEC-filed example, the proposed structure connected seller indemnification to holdback shares and, in some circumstances, earnout payments. [1] That linkage can change the practical value of contingent consideration even if the nominal total is unchanged. Flag whether a buyer may deduct an asserted amount before liability is finally determined, and ask counsel to explain the effect under the governing documents.

The goal is not to predict every claim. It is to identify which proceeds are available, which are restricted, and which can be reduced by a different obligation.

Score execution conditions and walk-away rights

A favorable price does not compensate for an LOI that gives the buyer broad discretion to stop. Compare the diligence standard, financing condition, board or shareholder approvals, material-adverse-change language, required consents, employment agreements, regulatory approvals, and any requirement that the final agreement be satisfactory to the buyer. Note whether the LOI makes only selected provisions binding or creates broader obligations.

Exclusivity can have material opportunity cost. Check its duration, scope, exceptions, information-sharing limits, fiduciary-out or superior-proposal language where relevant, and the remedy for breach. The SEC-filed LOI included a no-shop period, confidentiality terms, termination mechanics, and a termination fee, while also stating that many transaction provisions would remain subject to definitive documentation. [1] Those provisions show why the LOI should be reviewed as an allocation of process risk, not just an outline of price.

Mark each condition as objective, consent-based, or discretionary. A condition that depends on a named approval is different from one that allows a party to decide whether the result is satisfactory in its sole discretion. The exact legal effect depends on the text and governing law, so obtain counsel's review.

Build a comparison sheet that exposes unknowns

Use one row for each economic or execution term and one column for each LOI. At minimum, include cash at closing, debt and cash treatment, working-capital mechanism, escrow or holdback, seller note, earnout metric, earnout period, stock or rollover equity, indemnity cap and basket, setoff, financing, approvals, diligence, exclusivity, termination, governing law, and unresolved drafting points.

For every row, record the exact LOI language or a short neutral summary, the source page or section, the accountable reviewer, and a status such as agreed, proposed, missing, or needs counsel. Use a separate scenario column for assumptions. This prevents a comparison from silently converting missing terms into favorable terms.

A practical workflow owner can use software to extract candidate terms into a draft matrix, but a human deal lead should verify each extraction against the signed or circulated LOI. Check numbers, dates, definitions, negations, cross-references, and whether a clause is binding. Stop the workflow if the source file is incomplete, the version is uncertain, or a term changes the economic comparison without clear language. Do not use an automated draft to send outreach, negotiate, approve terms, or disclose confidential material.

Use human review before choosing an LOI

The best LOI is not necessarily the one with the highest headline value. It is the one whose consideration mix, measurement rules, buyer obligations, conditions, and remedies fit the seller's objectives and risk tolerance. Ask transaction counsel to review binding effect, exclusivity, remedies, indemnity, governing law, and definitive-document protections. Ask a tax adviser to review the proposed allocation and payment timing. If stock or rollover equity is material, obtain advice appropriate to that investment exposure.

Acquivo gives business owners the entire sell-side process an investment bank would run, as software, with no success fee. It is user-operated software, so the owner and chosen advisers remain responsible for reviewing source documents, deciding what to accept, and obtaining professional advice. Acquivo is a software platform that delivers the entire sell-side M&A process, valuation, marketing materials, buyer matching, and deal management, on one platform for business owners, M&A attorneys, and boutique investment banks.

Before signing, produce a one-page decision record that states the preferred LOI, the reasons, the unresolved points, the downside scenario, and the person responsible for each next review. That record will not replace counsel or tax advice, but it can make the tradeoffs explicit and reduce the chance that a contingent promise is mistaken for cash in hand.