For what happens before the LOI — including how to handle the first meeting aftermath — see our post-meeting playbook. The NDA comes before the LOI in the deal timeline — sign and negotiate it before you share anything material. The CIM comes before the LOI — see our CIM writing guide. Before the LOI is signed, you'll need to have negotiated the full deal package — see our guide to HVAC sale price negotiation.
What Is an LOI?
A letter of intent is a short document — typically 4–8 pages, 10–15 sections — that a PE buyer sends after they've decided they want to acquire your business. It sets the framework for the deal: the headline purchase price, deal structure, payment form, and key conditions. Think of it as the blueprint before the architectural drawings.
The common wisdom is that an LOI is “non-binding.” That's mostly true for price and deal structure — those terms are subject to change during due diligence. But one provision is absolutely binding: the exclusivity clause. The moment you sign, you're locked out of talking to other buyers for 60–90 days. That's the most important line in the document.
The LOI also establishes the payment architecture: how much is cash at close, how much is an earn-out, whether there's rollover equity, and whether a seller note is involved. Understanding those components is what determines whether the headline number means anything at all.
The 8 Sections Every Seller Must Understand
These are the clauses that determine your actual payout — not the headline. Read each one carefully before you sign anything.
Purchase Price
The purchase price line in an LOI is almost never the number you receive at close. The key question is whether it represents enterprise value or equity value, and whether it's stated pre- or post-working capital adjustment. A $7M headline can become $6.2M after the working capital peg is applied at closing.
Watch for: vague language like “subject to customary adjustments.” That phrase can hide a six-figure reduction. Link the purchase price to a specific, defined calculation methodology before you sign.
Deal Structure
The LOI will specify whether this is an asset sale or a stock sale. This matters enormously for your tax treatment and liability exposure. PE buyers almost always prefer an asset sale — it lets them step up the tax basis on acquired assets, reducing their future tax burden. Sellers typically prefer stock sales because they generate capital gains treatment on the full proceeds rather than ordinary income on certain asset classes.
Watch for: an asset sale structure that doesn't come with a price adjustment to compensate you for the tax difference. The delta between asset and stock treatment on a $5M deal can exceed $150K.
Working Capital Peg
This is where deals quietly shrink. PE sets a “normalized” working capital target — often expressed as a percentage of trailing revenue (e.g., “NWC = 12% of TTM revenue”). If your actual working capital at close falls below that peg, the shortfall is deducted dollar-for-dollar from the purchase price.
The trap: PE's accountants often anchor the target using a trailing 12-month average that includes your seasonally strong months — setting a peg you can't realistically hit in a shoulder season close.
Watch for: any working capital methodology that isn't clearly defined in the LOI. “To be determined in the purchase agreement” is not acceptable. Push for a rolling average that excludes obvious seasonal peaks.
Earn-out Provisions
If there's an earn-out, the LOI will define the metric (EBITDA, revenue), the measurement period (typically 12–36 months post-close), and the cap. Most earn-outs pay out at 50–70% of their headline value. Once PE controls operations, budgets, and reporting, the metrics that trigger your payment are largely in their hands.
Watch for: earn-outs with vague metrics, long measurement periods (36+ months), or language that gives management discretion over the triggering calculations. Cap earn-outs at 20% of deal value and require hard, independently verifiable triggers.
Rollover Equity
PE may ask you to reinvest 10–20% of your deal proceeds into the new combined entity rather than taking them as cash. This “rollover equity” is framed as an alignment mechanism — you stay financially tied to the platform you helped build. It's not always in the first LOI, but watch for it.
Rollover can generate a second liquidity event when the PE firm eventually sells the platform (typically 3–7 years out) at a higher multiple than you received. It can also go to zero if the platform underperforms.
Watch for: rollover that isn't clearly defined in terms of valuation method, governance rights, and liquidity path. Don't roll equity without understanding the waterfall.
Representations & Warranties
The LOI will describe the scope of representations and warranties coverage expected from the seller. Reps and warranties are the binding statements you make about the business in the purchase agreement — its financials, contracts, litigation exposure, employee matters, and more. Overly broad reps with long survival periods create post-close indemnification exposure.
Watch for: reps survival periods longer than 18 months and indemnification caps above 20% of deal value. Push for a 12-month survival and a 10–15% cap.
Exclusivity / No-Shop Clause
This is the only provision that is unambiguously binding. The no-shop clause prevents you from soliciting, encouraging, or entering into discussions with other buyers during the exclusivity window. Standard is 60–90 days. Anything above 120 days is too long — negotiate it down.
During exclusivity, your leverage collapses. The buyer knows you can't run to a competitor. Use the window before LOI signing to run a competitive process and generate at least two letters of intent. That competition is what gives you the power to push back on structural terms.
Watch for: exclusivity periods longer than 90 days, automatic renewal language, and any provision that restricts you from having general conversations with advisors or attorneys.
Conditions to Closing
This section lists the conditions that must be met before the deal can close. Watch for three in particular: a financing contingency (the buyer can walk if debt markets move against them), a QoE sign-off (the deal dies if the quality of earnings audit finds material issues), and a material adverse change (MAC) clause (buyer can exit if the business materially deteriorates before close).
Watch for: a financing contingency without a committed capital letter from the buyer's lender. “Subject to financing” is a buyer option to walk. “Committed capital” is a buyer obligation to close.
The LOI is not the closing check
The purchase price in the LOI is not the number on the closing check. Working capital adjustments, earn-out structure, and rollover equity can reduce your realized proceeds by 15–30%. Model every LOI — not just the headline.
The LOI Negotiation Window
Everything in an LOI is negotiable — but only before you sign. The moment you enter exclusivity, your leverage collapses. The buyer has 60–90 days, a full diligence team, and no competition to worry about. You have a signed no-shop clause and a clock running against you.
The buyer's first LOI is optimized for them. It's drafted by their M&A team and their attorneys, built on dozens of prior transactions. Most HVAC sellers have done exactly zero. That asymmetry is expensive unless you close it before you sign.
Three things to negotiate hard before exclusivity starts:
- 1
Exclusivity period length.
Push for 60 days, not 90. Every day in exclusivity is leverage the buyer holds over you. A shorter window forces them to move faster on due diligence and reduces the window for re-trading.
- 2
Working capital target and methodology.
Don't let “working capital methodology to be determined” survive into the purchase agreement. Get the calculation method — which months, which accounts, which exclusions — locked in the LOI. This is the easiest post-LOI re-trade lever buyers have.
- 3
Earn-out metric definition and measurement period.
If there's an earn-out, the specific metric (adjusted EBITDA vs. revenue vs. gross profit), the measurement start date, the measurement period length, and who calculates it need to be in the LOI — not deferred to the purchase agreement. Vague earn-out terms in the LOI become expensive earn-out disputes after close.
Strong vs. Weak LOI: Side-by-Side
Use this comparison when you receive your first LOI. A weak LOI isn't a reason to walk — but it is a negotiating roadmap.
| Element | Strong LOI (Seller-Friendly) | Weak LOI (Buyer-Friendly) |
|---|---|---|
| Exclusivity period | 60 days | 90–120 days |
| Working capital methodology | Clearly defined, trailing 12-mo average | Vague or “to be determined in purchase agreement” |
| Earn-out | Short period, objective metric | Long period, buyer controls the metric |
| Financing contingency | None (committed capital) | “Subject to financing” |
Know your number before the LOI arrives
Run your HVAC valuation before you get to the LOI stage. Knowing your number is what gives you leverage at the table. Then download the Full Valuation Report to get the breakdown PE buyers use to price your company.
Frequently Asked Questions
Is an LOI legally binding?
Most of it isn't — but the exclusivity/no-shop clause IS binding. That's the provision that locks you in and prevents you from shopping the deal to other buyers during the due diligence period. Treat the LOI as binding in practice even where it isn't legally.
How long does it take to go from LOI to close?
Typically 60–120 days after LOI signing for a PE acquisition. The LOI exclusivity period (60–90 days) roughly maps to this, though complex deals can run longer. See our HVAC PE deal timeline for a full breakdown.
Can I back out after signing an LOI?
Usually yes — the substantive deal terms are non-binding. But backing out after exclusivity begins damages your reputation with that buyer and can complicate future conversations. Don't sign unless you're ready to close if the diligence confirms the deal terms.
OffRamp is a free valuation tool for HVAC business owners. We don't sell your information, represent buyers, or work on commission. The calculator and reports are educational tools — always consult a licensed M&A advisor before entering a sale process.