Summary
Learn why the letter of intent (LOI) is one of the most important documents in a search fund acquisition, how it shapes pricing, exclusivity, and due diligence scope, and why most buyers underestimate its long-term impact on deal outcomes.
Most search funders treat the letter of intent as a formality. A milestone. The moment you shake hands on the general shape of a deal before the real work of due diligence begins. It is non-binding, they tell themselves, so the specific wording matters less than getting it signed and moving forward.
That view is one of the more expensive misunderstandings in the search fund process.
The LOI is non-binding in the legal sense, meaning neither party is contractually committed to completing the transaction on the terms stated. But it is profoundly binding in every practical sense that actually determines how the rest of the process unfolds. The price range established in the LOI becomes the anchor for every subsequent negotiation. The exclusivity period it sets determines how much time a buyer actually has. The due diligence scope it defines shapes what the seller will allow to be examined and how deeply. And the structural terms it outlines, however preliminary, tend to persist through the final agreement in ways that are far more durable than most buyers expect when they sign.
In this article
- Why the LOI is more binding in practice than in law
- The price anchoring effect and how it shapes negotiations
- How exclusivity periods influence due diligence quality and pressure
- Why due diligence scope is effectively set at LOI stage
- Common mistakes search funders make when signing LOIs
- What preparation should be done before signing an LOI
- How AI tools like Kudra support pre-LOI analysis
The Anchoring Problem
The most consequential thing an LOI does is establish a price anchor. Once a number has been agreed in principle and committed to paper, moving meaningfully away from it requires either a significant discovery during due diligence or an extended negotiation that both tests the seller’s patience and risks the relationship the search funder has spent months building.
This anchoring effect operates in both directions. A search funder who anchors too high in the LOI in order to secure exclusivity and then plans to negotiate down during due diligence is pursuing a strategy that experienced sellers and their advisers recognise immediately. The seller who feels they agreed a price and then watched it erode as due diligence proceeded is not a cooperative transition partner. They are a seller who feels they were misled, and they behave accordingly through every remaining conversation about structure, transition, and earnout.
A search funder who anchors too low, on the other hand, may never get to due diligence at all if the seller simply moves on to another buyer. The LOI price is not a placeholder. It is the foundation on which the entire subsequent relationship is built, and getting it right requires having done enough analytical work before signing to know what a genuinely defensible number looks like for this specific business.
Exclusivity and Why It Is Never Enough Time
The exclusivity period negotiated in the LOI is almost always shorter than the due diligence process actually requires. This is not an accident. Sellers and their advisers understand that time pressure is one of the most powerful forces pushing a buyer toward close, and a short exclusivity window creates exactly that pressure while maintaining the option to walk away and resume market conversations if the deal stalls.
Search funders who do not negotiate the exclusivity period carefully often find themselves in a position where the analytical work their decision actually requires cannot be completed in the time available without cutting corners. And search funders who cut corners on due diligence because of an exclusivity deadline they agreed to without thinking are not making a free choice. They are paying the consequences of an LOI they did not negotiate well enough.
The right exclusivity period depends on the complexity of the business, the quality of the data room, and how much analytical work can realistically be completed in parallel rather than sequentially. A business with a large, disorganised data room and multiple complex operational dependencies needs more time than one with clean financial statements and a simple business model. Building that assessment into the LOI negotiation requires knowing something specific about the business before the LOI is signed, which brings the argument back to the same place. The analytical work that most search funders treat as a consequence of signing the LOI should actually begin, at least in preliminary form, before it.
The Due Diligence Scope That Gets Agreed Without Being Noticed
The LOI typically contains language about the scope of due diligence the seller will permit. This language is often boilerplate and often does not receive the scrutiny it deserves from a buyer focused primarily on getting the price and exclusivity terms right.
But scope matters. A seller who agrees to provide reasonable access to financial records and management but reserves the right to limit access to customer lists, employee compensation, and supplier contracts has significantly constrained what a thorough due diligence process can actually examine. These limitations, once agreed in the LOI, are very difficult to reverse later without creating friction that threatens the broader relationship. A buyer who discovers mid-diligence that the seller is unwilling to provide information they need has limited recourse if the LOI did not specifically require that information to be made available.
The search funders who negotiate LOI scope most effectively are the ones who have already done enough preliminary analysis to know which categories of information are most important for this specific deal, before they sit down to negotiate what the seller will and will not allow. That knowledge comes from a real, if preliminary, engagement with whatever financial and operational information is available before the LOI is signed.
| LOI term | Common mistake | What better preparation produces |
|---|---|---|
| Price range | Anchored to a general sense of the deal rather than a specific analytical view | A defensible range grounded in preliminary financial analysis with stated assumptions |
| Exclusivity period | Accepted as proposed by the seller without assessing what the due diligence actually requires | A period calibrated to the specific complexity of this business and this data room |
| Due diligence scope | Accepted as boilerplate without identifying which specific information categories are most critical | Specific carve-ins for the information categories that the preliminary analysis has already identified as essential |
| Conditions to closing | Left vague in the interest of getting the LOI signed quickly | Specific material adverse change conditions and key representations that protect the buyer if something significant changes between signing and close |
| Transition requirements | Addressed generically or deferred entirely to the final agreement | Preliminary transition commitments stated specifically enough to set expectations before the detailed due diligence reveals how significant they actually need to be |
What You Need to Know Before You Sign
Getting the LOI right requires doing a meaningful amount of analytical work before signing it. Not the full due diligence, which is impossible without data room access, but enough to form a genuine view on the price range, the exclusivity requirement, and the scope of information that will be essential. That preliminary analysis is exactly what most search funders skip, treating the LOI as the beginning of the analytical process rather than as a document that requires its own analytical foundation.
The preliminary financial review, even from a limited set of documents such as a CIM and two or three years of top-level accounts, can give a search funder enough to anchor a price range analytically rather than intuitively. A first pass read of whatever operational information is available before the data room opens can identify which information categories are likely to be most important, informing the scope language worth negotiating. And an honest assessment of the business’s apparent complexity, even from the outside, can calibrate a realistic exclusivity period before the seller’s broker proposes one that serves their interests rather than the buyer’s.
None of this requires access to information the seller has not yet provided. It requires treating the preliminary information that is available with the same analytical seriousness that the full due diligence will eventually apply, rather than reserving all analytical effort for after the LOI is signed and the exclusivity clock has already started running.
Kudra supports exactly this kind of preliminary analysis. Before a data room has been fully opened, a search funder can upload whatever preliminary financial information is available and ask Kudra to produce an initial valuation range, identify the analytical questions that will be most important to resolve during due diligence, and flag the information categories that are likely to be most material for this specific business type. That output gives the LOI negotiation an analytical foundation it would otherwise lack, and it makes every subsequent LOI term more precisely calibrated to the deal’s actual requirements rather than to a general template.
References
- https://hbr.org/2006/11/the-power-of-the-anchoring-effect
- https://www.investopedia.com/terms/l/letter-of-intent.asp
- https://www.mckinsey.com/capabilities/strategy-and-corporate-finance/our-insights/mergers-and-acquisitions
- https://www.pwc.com/gx/en/services/deals/mergers-acquisitions.html
- https://www.bain.com/insights/value-creation-in-ma/
- https://www2.deloitte.com/global/en/pages/mergers-and-acquisitions/articles.html
- https://www.sba.gov/business-guide/plan-your-business/buy-existing-business
- https://www.searchfunder.com/article/letter-of-intent-in-search-funds
