How to read a tech letter of intent
What the LOI actually commits you to
A letter of intent sets out the price, the structure and the timetable a buyer proposes. Most of it is non-binding, so either side can walk. The clauses that do bind are exclusivity, confidentiality and costs, and exclusivity changes the balance of power: once you sign, you stop talking to other buyers.
That is why the LOI is the last point where you have full leverage. Terms that look minor here, such as the earnout metric or the indemnity cap, are very hard to reopen once diligence has started.
Headline price versus effective value
The decoder splits the headline into cash at close, escrow, seller note, earnout and the working capital adjustment, then discounts every deferred dollar at your risk rate. The result is the Risk-Adjusted Effective Value: what the offer is worth today.
With the default inputs, a $50 million offer with a $12 million three-year earnout at 55% probability, a 10% seller note, 10% escrow and a $600,000 working capital shortfall is worth about $41 million. The earnout alone accounts for most of the gap. Stress-test it in the earnout modelling tool and set the peg with the NWC peg calculator (opens in a new tab).
Market terms versus red flags
These ranges are typical for lower and core mid-market software deals. They move with sector, size and how competitive the process is.
| Term | Close to market | Worth pushing back |
|---|---|---|
| Exclusivity | 45-60 days | More than 90 days or open-ended |
| Earnout share | Up to 20-25% of price | Above 30% of price |
| Earnout metric | Revenue, ARR or gross profit | EBITDA or buyer discretion |
| Indemnity cap | Around 10% of price | Above 30% or no cap |
| Survival period | 12-18 months | 36 months or more |
| Escrow / holdback | 5-10%, released at 12-18 months | 15%+ or open release |
| Stability period | 6-12 months | 24 months+ with no early release |
| Non-compete | 2-3 years, defined scope | 5 years or worldwide |
How to counter an LOI
Counter on structure first. Moving $3 million from earnout into cash at close is often worth more than a $3 million higher headline. Ask for an earnout measured on revenue or gross profit, with operating covenants that stop the buyer starving the business of investment.
Then tighten protection: a defined indemnity cap and survival period, escrow released on a fixed date, named conditions to close and a short, extendable exclusivity window. Compare two offers side by side in the deal structure comparison.
Before you sign exclusivity
Have your numbers ready for diligence, because most re-trades come from findings the buyer could have predicted. Run the QofE readiness assessment (opens in a new tab) and grade your add-backs in the EBITDA normaliser (opens in a new tab). If the offer arrived unprompted, read our guide to handling an unsolicited offer (opens in a new tab).
Frequently asked questions
- Is a letter of intent binding?
- Mostly not. The price and deal terms in an LOI are usually non-binding, but a few clauses normally are: exclusivity (no-shop), confidentiality, costs and governing law. Exclusivity is the one that matters most, because it takes you off the market while the buyer runs diligence.
- How do I counter a tech LOI?
- Counter on structure before price. Ask for more cash at close, a shorter exclusivity window, an earnout on revenue rather than EBITDA, a 10% indemnity cap with a 12-18 month survival period, and named conditions to close. A buyer who has issued an LOI expects a markup.
- What is a standard stability period in tech M&A?
- Founders are commonly asked to stay six to twelve months after close for a transition, and up to the full earnout period when part of the price depends on future performance. Anything beyond 24 months is long and should be linked to clear milestones or early release.
- How long should LOI exclusivity be?
- For a well-prepared lower mid-market software business, 45 to 60 days is common, extendable by mutual agreement. Open-ended or 120-day exclusivity gives the buyer time to re-trade with no competitive pressure.
- What is a normal indemnity cap?
- In mid-market technology deals, general warranty claims are commonly capped at around 10% of the price, often lower when warranty and indemnity insurance is in place. Fundamental warranties such as title and capacity are usually capped at the full price.
- What share of the price should be earnout?
- Many tech deals carry some deferred consideration, but once the earnout passes about a quarter of the headline, the seller is carrying a large share of the buyer’s risk. Model the scenarios in the earnout tool before you accept.