How to Negotiate the Sale of Your Company From IOI to Close

The day you sign exclusivity, the leverage in your deal changes hands. Before it, several buyers are competing and each one is afraid of losing. After it, one buyer has thirty to sixty days in which you may not talk to anyone else, a diligence team looking for reasons to pay less, and full knowledge that your other bidders have gone cold and your team is tired. Almost everything that erodes a price happens after exclusivity. Founders negotiate the headline number hard in the LOI and treat the rest as legal detail, and the rest is where the money goes.

Then comes the re-trade. Diligence finds something, a quality of earnings adjustment, a churned customer, a contract with a change-of-control clause, a working capital shortfall, and the buyer comes back with a lower number, politely and with a spreadsheet. Some re-trades are fair; the finding is real and nobody knew. Many are planned from the start: bid high to win exclusivity, then negotiate down once the competition is gone. You cannot tell which kind you are facing from the tone. You can only prepare so that the buyer finds nothing you had not already disclosed, and so that you have somewhere else to go.

The headline price is not the number. The number is what reaches your account, after the peg, the net debt, the fees, the escrow, the earnout that may not pay, the rollover you cannot spend, the preference stack, and tax. Two offers with the same headline can be millions apart by that measure, and the lower headline is often the better deal.

The goal: A proceeds model that converts every offer into cash at close, cash likely within two years and contingent value; a term sheet negotiated before exclusivity on the points that decide those numbers; and a written walk-away tied to your Floor, Enough and Temptation, held by you and your board.

Background

The stages. An indication of interest (IOI) is a non-binding range from each buyer after they read the CIM; it narrows the field. Management presentations and early diligence follow. A letter of intent (LOI) is a non-binding offer with a price, a structure and the key terms, plus binding exclusivity and confidentiality. Confirmatory diligence, the quality of earnings review and the purchase agreement come after it. Then signing, and closing, sometimes the same day.

The terms that move money.

1. Enterprise value and net debt. Most deals are priced cash-free, debt-free: the buyer pays enterprise value, you keep the cash, and debt comes out of your proceeds. The fight is over what counts as debt. Buyers will propose unpaid taxes, accrued bonuses, deferred compensation, customer deposits, transaction expenses, and in software, some or all of deferred revenue.
2. The working capital peg. The price assumes the business is delivered with a normal level of working capital, set as a target called the peg, commonly based on a trailing twelve-month average. Deliver less at close and the price drops dollar for dollar. In a SaaS business billed annually in advance, deferred revenue makes working capital negative and seasonal, so the month the peg is measured against, and whether deferred revenue sits inside working capital or is treated as debt, can move the price by more than any other clause in the deal.
3. Escrow and holdback. A portion of the price held back to cover indemnity claims. Without insurance it is commonly around ten percent of the price for twelve to eighteen months. With representations and warranties insurance, the seller's exposure often shrinks to a small retention, and a clean escrow is money you will probably see. Always model it as deferred, not received.
4. Representations and warranties insurance. A policy the buyer buys, often at the seller's partial expense, that covers breaches of your representations. It is now common in private-equity deals of meaningful size and it changes the indemnity negotiation for the better. Price it early.
5. Indemnity. What you owe the buyer if a representation proves false. The cap for general reps, the basket before claims start, and the survival period all matter. Fundamental reps — title to shares, authority, capitalization — usually carry a cap up to the full price. Fraud is uncapped, which is one more reason to disclose everything.
6. Earnouts. Part of the price paid later if the business hits targets. They close valuation gaps on paper and open disputes in practice. After close the buyer controls the budget, the hiring, the pricing, the accounting and the integration, and every one of those can move the metric. Many earnouts pay out partially or not at all. Treat one as a lottery ticket priced at a discount, not as purchase price.
7. Rollover equity. Part of your proceeds reinvested in the buyer's new holding company, common in private-equity deals. It can be a real second bite, and it is minority equity, behind new debt and often behind the sponsor's preferred terms, with no control and no liquidity until their exit. Model it as possible upside, not money.
8. Employment, consulting and non-compete terms. If you are staying, your role, reporting line, compensation, what happens if you are terminated without cause, and how that interacts with any earnout. The non-compete's length, geography and definition of competition will govern what you do next.

Steps

1. Build the proceeds model before the first IOI arrives. Your CFO and counsel model, for any enterprise value, the path to your account: minus net debt and debt-like items, plus or minus the working capital adjustment, minus transaction fees (banker, legal, accounting, insurance), minus escrow, minus contingent earnout, minus rollover, then through the preference stack and any management carve-out to common, then to you, then after tax. Output three numbers per offer: cash at close, cash likely within twenty-four months, and contingent value. Only the first is certain.
2. Write the walk-away before you see an offer. Take the Floor, Enough and Temptation from your Meaningful Exit Plan and express each as cash at close from the proceeds model. Decide with your board, in writing, which terms you will not accept at any price. Keep Temptation out of the room with the buyer and out of the banker's hands. The founder who has not written these down will discover them, one concession at a time, in the last week, tired.
3. Compare IOIs on structure, not on headline. Ask the banker to get each bidder to state, before management meetings, their assumed net debt treatment, their approach to deferred revenue, whether they will use insurance, the earnout and rollover they expect, and their financing. Buyers who refuse to say now will say it later, after exclusivity, when it costs you more.
4. Negotiate the LOI as if it were binding, because practically it is. Everything you leave vague in the LOI will be resolved in the buyer's favor during exclusivity. Push the points that decide the money into the LOI:
   • Enterprise value, with the cash-free, debt-free basis stated.
   • The working capital peg methodology and the treatment of deferred revenue, with a number if you can get one.
   • A definition of debt with a named list, not "customary debt-like items."
   • Escrow size and duration, insurance, the indemnity cap and basket.
   • Earnout metric, period, accounting and the operating covenants that protect it.
   • Rollover amount and the terms of the new equity.
   • Retention pool size and who funds it.
   • Exclusivity length, thirty to forty-five days rather than ninety, with an extension only by mutual agreement.
5. Keep a second bidder warm until signing. Before granting exclusivity, have the banker tell the runner-up that you have chosen another party for now and would like to stay in touch. After exclusivity, respect the no-shop to the letter. But a buyer who knows your alternative is recent and real behaves differently from one who knows it has gone cold, and the second bidder is the only thing that makes walking away credible.
6. Get ahead of the re-trade. Put a sell-side quality of earnings report in the data room from the Pre-Sale Value Levers play, and disclose every known issue in writing before the LOI, with its explanation. A buyer cannot credibly re-trade on something disclosed before they priced. When a re-trade comes anyway, ask for the finding in writing with its supporting analysis, check it with your CFO and accountant, and answer on the evidence. Where the finding is real and new, negotiate a fair adjustment or a specific indemnity instead of a price cut. Where it was known, say so, show where it was disclosed, and hold the price.
7. Fight the peg with your own analysis. Have your CFO or accountant compute normalized working capital month by month for the last twelve to twenty-four months, show the seasonality from annual billing, and propose a peg and a deferred revenue treatment backed by the data. The buyer's first proposal will be built to their advantage; your counter must be built on numbers they cannot dismiss.
8. Do not negotiate the purchase agreement yourself. Hire M&A counsel who does this every month, let the banker and counsel carry the confrontations, and reserve your voice for the few issues only you can decide. You will need to work with this buyer for years if you stay; they should remember you as the person who solved problems, not the one who shouted in the room. No bluffs. Never threaten to walk away unless you would, because the buyer will test it.
9. Decide the earnout, the rollover and your role as one package. If you are asked to take an earnout, insist on revenue rather than EBITDA, a short period, clear accounting, operating covenants, and acceleration if you are terminated without cause or the business is sold again. If you are asked to roll equity, read the new holding company's terms and debt load as carefully as a new investor would. If you are staying, check that your employment terms, the earnout and the non-compete do not combine to trap you.
10. Walk away when the deal crosses the line you wrote. Not when you feel insulted, which will happen repeatedly, but when cash at close falls below the Floor, or a term appears that you and your board agreed you would not accept. Say so plainly, once, through the banker, with the reason. Some buyers come back. The ones who do not were never going to close on terms you could live with.
11. Re-run the proceeds model and the walk-away check against every revised offer and every draft of the purchase agreement, until close. The CFO owns the model, counsel flags every change to a money term, and the founder and board chair review each round against the written walk-away in a thirty-minute call before anyone responds. The question each time is the same: what reaches us now, what reaches us later, and has anything crossed a line we drew before we were tired.

Troubleshooting

The buyer's offer is higher than we hoped but half of it is earnout. Then the offer is the cash half plus a discounted option on the rest. Compare the cash at close to your Floor and Enough. If the cash alone clears Enough, the earnout is upside; if you need the earnout to reach the Floor, you are betting your exit on a business the buyer will run.

The buyer re-traded after QoE and says the other bidders are gone anyway. Check whether the finding was disclosed; if it was, say so and hold. Ask the banker whether the runner-up will still take a call the day exclusivity lapses, and do not make that call a day sooner; breaking a no-shop hands the buyer a better reason to cut than any QoE finding. A buyer who has invested months in diligence, legal fees and insurance underwriting wants to close too. Their leverage is real, but it is not total.

We have been in exclusivity for sixty days and they keep asking for more time. A long exclusivity is a slow re-trade. Agree to an extension only in exchange for something, a narrowed diligence list, a confirmed price, a signed agreement on the peg, and set a hard date after which the no-shop ends.

I just want this to be over. So does every founder at this point, and the buyer knows it. That longing is the most expensive feeling in the process. It is exactly why the walk-away was written months earlier, while you could still think clearly. Read it before you answer.