Letter of Intent
Also known as: LOI · Term Sheet
A letter of intent (LOI) is a non-binding outline of the major economic and structural terms of a proposed acquisition, signed before formal due diligence begins.
What is letter of intent?
The LOI is the first formal document in any agency transaction. It's not a contract — most provisions are explicitly non-binding — but it locks in the deal's shape: purchase price, structure (asset vs. stock), payment terms (down payment, seller note, earnout), exclusivity period, and the timeline to close.
The binding provisions in an LOI are typically the exclusivity (no-shop) clause and confidentiality. Everything else gets re-negotiated in the definitive agreement based on what diligence uncovers.
A good LOI is detailed enough to surface deal-breakers early. A bad LOI is vague enough that the seller signs and then the buyer drags out diligence and re-negotiates aggressively, knowing the seller is locked into exclusivity.
Why it matters in agency valuation
Once you sign an LOI, you typically can't talk to other buyers for 30–90 days. That's a real cost. Make sure the LOI is detailed enough that you know what you're committing to. Pay particular attention to working-capital adjustment language, the definition of EBITDA being multiplied, and any earnout mechanics — those are where buyers chip away post-LOI.
Example
Common questions
Should I have an attorney review the LOI?
Yes, always. Even though most of the LOI is non-binding, the structure it sets becomes the gravity well for the rest of the deal. An attorney experienced in agency M&A will spot the language that needs tightening before you sign.
Related terms
An asset sale transfers specific assets of the agency (the book of business, contracts, equipment) to the buyer while leaving the legal entity behind with the seller — the most common structure in P&C agency transactions.
A stock sale transfers ownership of the agency's legal entity itself to the buyer, transferring all assets and liabilities together — generally seller-favorable from a tax perspective but rare in agency transactions.
An earnout is a portion of the purchase price paid to the seller after closing, contingent on the business hitting specified retention, revenue, or EBITDA targets — typically 10–30% of the total price across 1–3 years.
A seller note is a portion of the purchase price the buyer owes the seller as a loan rather than cash at close, typically structured at 4–7% interest over 3–7 years.
A working capital adjustment trues up the purchase price at close based on whether the agency delivered the expected level of net working capital (current assets minus current liabilities) on the closing date.
Last reviewed: April 24, 2026
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