LOI Value Decoder.
A $50 million headline price is rarely $50 million. Enter the terms of your letter of intent to see its Risk-Adjusted Effective Value: what the offer is worth once earnouts, seller notes, escrow and the working capital peg are priced for risk and time.
LOI Terms
The enterprise value quoted on the first page of the LOI.
Your honest estimate of hitting the targets under the buyer's ownership.
Target net working capital set in the LOI.
What the balance sheet will actually deliver.
Applied to every dollar paid after close. Deferred consideration is unsecured credit to the buyer.
Risk-Adjusted Effective Value
- Cash at close, net of escrow · Paid on completion$28,000,000
- Escrow / holdback · 85% expected release, year 1$3,794,643
- Seller note · 3 yr at 6%, discounted$4,501,526
- Earnout · 55% probability, discounted$5,284,029
- Working capital adjustment · Shortfall against peg$-600,000
How the Risk-Adjusted Effective Value is calculated
Cash at close
Cash at close is the headline price less the earnout and the seller note. Escrow or holdback is then deducted, because that money sits with an agent and is not yours on completion day. This is the only line in the model that is not discounted.
Earnout
The earnout is split evenly across its duration, multiplied by your probability of achieving the targets, and each year is discounted back at the risk rate. Earnouts are paid under the buyer's control, which is why the probability input matters more than any other. Model scenarios in detail with the Earnout Modelling Tool.
Seller note and escrow
The seller note is modelled with equal annual principal repayments plus interest on the outstanding balance, each discounted at the risk rate. A seller note is usually subordinated to senior debt, so its coupon rarely compensates for its risk. Escrow is weighted by the share you expect to be released after the claims period, assumed to be twelve months.
Working capital peg
Most LOIs assume the business is delivered with a normal level of net working capital. If the balance sheet at close falls short of the peg, the price drops dollar for dollar. If it exceeds the peg, the surplus is added. See the working capital peg definition (opens in a new tab) for how pegs are usually set.
Reading the result
A worked example
With the default inputs, a $50 million offer carries a $12 million three-year earnout at a 55% achievement probability, a 10% seller note, a 10% escrow and a $600,000 working capital shortfall. After discounting at 12%, the offer is worth about $41.0 million, or 82% of its headline. The earnout alone accounts for $6.7 million of the $9.0 million gap.
Comparing two LOIs
Run each offer through the decoder with the same discount rate. A lower headline with more cash at close often beats a higher headline built on deferred consideration. Compare structures side by side in the Deal Structure Comparison.
This tool is for indicative modelling purposes only. LOI terms, escrow mechanics and working capital definitions vary significantly by deal and jurisdiction. Results do not constitute financial, legal, or tax advice. Engage a qualified M&A advisor and legal counsel before signing any letter of intent.
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