From LOI to Purchase Agreement: What Sellers Should Expect to Negotiate Twice

The Letter of Intent Is Not Your Deal

A Letter of Intent (LOI) feels like a milestone. The buyer has committed to an offer, shaken hands on price, and committed time and money to due diligence. Many sellers believe the LOI is the deal—that the purchase agreement is simply paperwork to document what was already agreed.

This assumption costs sellers money, terms, and sometimes deals themselves.

The LOI is an expression of intent to move forward on broad commercial terms. The purchase agreement (or definitive purchase agreement, DPA) is the legally binding contract that governs the transaction. Between LOI and DPA, two things happen: the buyer's attorneys get involved, and both parties learn things about the business that weren't visible at letter stage. The result is predictable: major terms get re-negotiated, often in the buyer's favor.

Understanding what will be re-traded, which terms deserve LOI-stage protection, and which concessions you should never make without legal counsel is essential to closing at your intended sale price.

Why Terms Shift from LOI to Purchase Agreement

The LOI is typically one to three pages. It captures purchase price, basic earn-out structure (if any), non-compete scope, and payment terms. It intentionally avoids granular detail—that's what diligence reveals and the DPA defines.

During the diligence phase, the buyer's accountants examine working capital composition, inventory valuation, and customer concentration. The buyer's legal team identifies environmental exposure, litigation risk, and lease assumptions. The buyer's operational team identifies which assets transfer cleanly and which require repair or remediation.

This new information gives the buyer leverage to demand different terms in the DPA than were contemplated in the LOI. If the buyer discovers that accounts payable are higher than expected, they will argue for a higher working capital peg. If litigation risk is material, they will demand higher indemnity caps and longer tail periods. If a key customer concentration is higher than disclosed, the buyer will request tighter non-compete restrictions.

These are not negotiations failures on your part—they are structural features of how M&A works. But they can be mitigated if you protect the right LOI positions and consult counsel before accepting LOI terms you cannot defend in the DPA.

The Three Terms That Always Get Re-Traded

Working Capital Peg

The LOI typically sets a target working capital number—often expressed as a dollar amount or a ratio of current assets to current liabilities. During due diligence, the buyer reconciles actual working capital against this peg.

If actual working capital comes in above the peg, the buyer will argue that they should pay less at closing or that the seller should retain the excess. If it comes in below, many buyers will demand a price reduction or claim the seller must fund a working capital adjustment at closing.

What sellers often miss: the definition of working capital itself. Does it include unbilled receivables? Accrued payroll? Prepaid inventory for a seasonal spike? The LOI rarely specifies. By the time the DPA is drafted, the buyer's counsel has a definition locked in—one that often captures more liabilities and excludes more assets than the seller anticipated.

**Seller protection:** Insist on a specific working capital definition in the LOI itself. Require that current assets and current liabilities be listed by account. If the buyer balks, that signals they are already thinking about adjustments. Have your accountant model various definitions so you know the cost of the buyer's preferred language before you agree to it.

Indemnity Caps and Baskets

The LOI might reference "customary indemnities for breaches of representation and warranty," but it almost never quantifies them. By the DPA stage, the buyer will propose an indemnity cap—a ceiling on the seller's liability for breach—typically expressed as a percentage of purchase price.

Buyer attorneys typically push for 10–15% caps. Sellers who didn't discuss indemnity architecture in the LOI often find themselves defending a 10% cap against breaches that could cost far more to remediate.

The "basket" (or "deductible") is also re-traded. A $25,000 basket in the LOI becomes a $100,000 basket in the DPA, meaning the seller only indemnifies claims above that threshold. This sounds trivial until you realize a customer concentration or title issue could cost $150,000 to fix—and you are now on the hook for the full amount because it exceeds the basket.

**Seller protection:** Discuss indemnity caps and baskets in the LOI or, at minimum, get your counsel's written assessment of typical market terms before you sign the LOI. If the buyer wants a 15% cap, quantify what that means in dollars. If you cannot stomach that exposure, push back in the LOI rather than the DPA, where the buyer has already spent legal fees and is motivated to close.

Non-Compete Scope and Term

The LOI might say "twelve-month non-compete within a 25-mile radius." This sounds clear until the DPA is drafted and the buyer's attorney defines "radius" as a circle measured from the business's registered office—not its customer base. Or the buyer interprets "within the business lines" to include ancillary services you never mentioned.

Non-competes are enforced differently across Arizona counties, and buyer counsel will cite case law to argue for expansions that your LOI language didn't contemplate. A 25-mile radius might seem reasonable when the customer base is concentrated downtown; it becomes onerous when you move to a rural location.

**Seller protection:** In the LOI, specify the geographic scope by reference to a map or by explicit exception (e.g., "not applicable to business conducted outside Arizona"). Define which business lines are restricted—specifically, which are not. If the buyer wants a broader non-compete than you can stomach, negotiate a time limit instead (e.g., five years instead of three, but only within 10 miles). Have your counsel review Arizona non-compete case law; some restrictions are unenforceable, and knowing this in advance gives you negotiating room.

What Sellers Should Never Agree to Without Legal Review

Before you sign an LOI, have an Arizona business attorney review these specific provisions:

**Representations and Warranties.** The LOI might include broad reps about environmental compliance, contract validity, or regulatory compliance. Do not agree to any rep you cannot personally certify. If the rep is industry-standard but you are uncertain about one clause, carve it out in the LOI rather than hoping to revisit it in the DPA.

**Earnout Calculations.** If the deal includes an earnout, the LOI defines how it is measured. Do not accept vague language like "EBITDA as reported by the buyer's accountant." Specify the adjustment categories, the approval process, and the buyer's obligations to maintain the business. Earnout disputes are common; define the terms crisply in the LOI.

**Seller Financing or Seller Notes.** If you are carrying a note, the LOI should specify the interest rate, repayment term, default provisions, and security. Buyer attorneys will attempt to soften these terms in the DPA if you do not nail them down early.

**Lease Assignment or Renewal.** If the sale assumes a lease, confirm in the LOI that the landlord will consent and that renewal terms are acceptable. Diligence often reveals that the landlord will not renew without rent increases, or that consent is conditional on the buyer meeting financial metrics the buyer cannot meet. Knowing this early prevents last-minute surprises.

**Regulatory or Licensing Contingencies.** If the business is licensed (food service, auto body, real estate), confirm in the LOI that the license is transferable and that the buyer can obtain it within the timeline. Do not let the buyer defer this diligence to the DPA stage.

The Practitioner's Approach

"Most sellers think the LOI is the deal," notes Eddy Roche, Associate Broker at HUB AZ Brokers | Sunbelt Business Brokers. "Then they watch terms shift in the DPA and feel blindsided. The ones who close successfully are the ones who consult counsel before signing the LOI, not after."

This is not adversarial negotiating. It is informed negotiating. The buyer's counsel will be thorough; yours should be too.

Closing the Gap: A Working Framework

As you move from LOI to DPA, use this framework to assess whether re-trades are fair or overreach:

1. **Distinguish between working capital timing and definition.** A shift in working capital peg due to actual inventory levels is normal. A shift because the buyer redefined what counts as "current assets" is a concession you should have negotiated in the LOI.

2. **Quantify indemnity exposure.** If the buyer proposes a 12% cap and you have identified no known breaches, that is defensible. If the buyer proposes it and you are aware of pending litigation, push back.

3. **Evaluate non-compete enforceability.** If the buyer wants a non-compete you believe is unenforceable under Arizona law, say so. Unenforceable provisions often fall entirely, leaving the buyer with nothing—they may negotiate down rather than risk that outcome.

4. **Reserve right-to-cure periods.** If the buyer identifies a breach in a representation, your DPA should include a cure period (typically 30–60 days) before indemnity is triggered. This is standard and fair.

5. **Know your walk-away line.** Before you sign the LOI, establish which terms you will not accept in the DPA. If the buyer demands them anyway, you have a clear answer.

Closing the Deal at Your Intended Price

The shift from LOI to DPA is normal, but it need not be a surprise. Sellers who understand which terms will be re-traded and which require early protection close at their intended prices and on their preferred terms. Those who treat the LOI as the final word often discover, too late, that they have conceded far more than they realized.

Working with a broker experienced in Arizona business transactions and consulting counsel before you sign the LOI positions you to navigate these negotiations confidently. BizSalesGuy.com and the team at HUB AZ Brokers | Sunbelt Business Brokers help Phoenix-area owners prepare for this phase, so they close with clarity and on their own terms.