What a middle-market LOI should resolve before exclusivity

The issue

A middle-market LOI typically does two things:

• It sets out proposed deal terms, which the parties usually intend to be non-binding.
• It imposes a few binding obligations, typically exclusivity (a “no-shop”), confidentiality, expense allocation and governing law.

The binding part usually gives the buyer a window in which the seller will not negotiate with anyone else. The non-binding part sets the expectations that the definitive agreement will be measured against.

Problems arise when important economic terms are left vague. The parties may also fail to say clearly which provisions bind them.

Commercial context

Before exclusivity, a seller with more than one interested buyer has leverage. After exclusivity, the buyer controls the diligence timeline, and the seller’s alternative is to wait out the exclusivity period. Points left open at signing, such as how working capital is measured or what an earnout is tied to, are often negotiated during diligence, when the seller has fewer alternatives. Buyers also benefit from clarity, which reduces the risk of later disputes.

Options: what to resolve, and how firmly

Price structure, not just headline price. Cash at closing, rollover equity, a seller note and an earnout can produce very different outcomes at the same headline number. The LOI should state the amount of each component. For the earnout, it should identify the metric, the measurement period and the main accounting principles. If rollover equity or buyer securities are part of the consideration, issuing them to the seller is itself a securities transaction that must be registered or qualify for an exemption, such as Section 4(a)(2).

Working capital. The LOI should state whether the price assumes a cash-free, debt-free basis and how working capital will be measured. It should also say whether a target (“peg”) will be set from historical averages. Leaving the method entirely to the purchase agreement shifts the issue into the exclusivity period.

Exclusivity terms. Length, extensions, and whether exclusivity ends early if the buyer proposes a lower price or materially different terms. Whether the seller may respond to unsolicited inquiries.

Diligence scope and timeline. Key diligence categories, access to management and customers, and target dates for a first draft of the purchase agreement.

Regulatory filings. Under the Hart-Scott-Rodino Act, the minimum size-of-transaction threshold is $133.9 million for transactions closing on or after February 17, 2026, as published by the Federal Trade Commission. The FTC’s guidance states that the threshold in effect at closing governs reportability. For transactions above that threshold but not above $535.5 million, size-of-person tests also apply. Filing fees are tiered by transaction value. Where a filing may be needed, the LOI can allocate the fee and set timing.

Key people and conditions. Proposed employment or consulting roles for the owners, required third-party consents, and whether the buyer’s obligation will be conditioned on financing.

Binding versus non-binding. List the binding provisions by section number and state that the rest is non-binding. Decide deliberately whether to include an express obligation to negotiate in good faith.

Pitfalls: how courts treat preliminary agreements

Texas: intent is often a fact question. In Foreca, S.A. v. GRD Development Co., 758 S.W.2d 744 (Tex. 1988), the parties initialed a handwritten document stating price, payment and delivery terms, marked “subject to legal documentation.” The Supreme Court of Texas held that whether those writings were intended as a final agreement or only as preliminary negotiations was a question of fact. The court said the “subject to legal documentation” language “is not conclusive on intent to contract.” It reversed the court of appeals and affirmed the trial court’s judgment for the seller, which rested on a jury verdict. The court relied on Scott v. Ingle Bros. Pacific, Inc., 489 S.W.2d 554 (Tex. 1972), quoting its statement that “[a]n agreement simply to enter into negotiations for a contract later does not create an enforceable contract,” but that parties “may agree upon some of the terms of a contract, and understand them to be an agreement, and yet leave other portions of an agreement to be made later.” Four justices dissented in Foreca. A drafting lesson follows: in Texas, a general “subject to” label may not settle the question of intent, while a clear statement of which provisions bind the parties gives the court better evidence.

Delaware: an express duty to negotiate in good faith can be enforced. In SIGA Technologies, Inc. v. PharmAthene, Inc., 67 A.3d 330 (Del. 2013), the parties’ bridge loan and merger agreements required them to negotiate a license in good faith in accordance with a term sheet. The term sheet itself was unsigned and marked “Non Binding Terms.” The Delaware Supreme Court held that the express contractual obligation to negotiate in good faith was enforceable. It also held that expectation damages may be recovered where the trial judge finds, on the record, that the parties would have reached agreement but for the bad-faith negotiation; it reversed the damages award in that case and remanded for reconsideration. Quoting earlier Delaware decisions, the court said that bad faith “implies the conscious doing of a wrong because of dishonest purpose or moral obliquity.” Language that requires good-faith negotiation, or that ties the definitive agreement to the LOI’s terms, can therefore have consequences beyond the label “non-binding.”

Other pitfalls.

• Exclusivity periods with no early-termination right if the buyer changes the terms.
• Confidentiality terms that do not cover the buyer’s financing sources and advisers.
• Governing-law clauses chosen without considering how that state treats preliminary agreements.

Buyer/seller discussion checklist

This list is for use with counsel and financial advisers. It is not an LOI form.

• Price components stated: cash at closing, rollover, seller note, earnout, escrow or holdback.
• Earnout terms set out: metric, accounting principles, period, and covenants on post-closing operations.
• Cash-free/debt-free basis and working-capital methodology described.
• Rollover security identified, with its exemption, governance rights and transfer restrictions.
• Exclusivity terms set: length, extensions, early termination on re-trade, treatment of unsolicited inquiries.
• Diligence scope, access and target timeline agreed.
• Regulatory filings (HSR or other) and responsibility for fees assessed.
• Key-employee and owner transition terms outlined.
• Financing, consent and other closing conditions stated.
• Binding provisions listed by section; deliberate decision made on any good-faith negotiation clause.
• Governing law chosen with preliminary-agreement case law in mind.
• Confidentiality extended to financing sources and advisers, with use restrictions.

General information only; not legal advice. Reading this article does not create an attorney-client relationship. The application of these principles depends on specific facts.