Scoring Competing LOIs: When the Highest Bid Is Not the Best Offer
Two letters of intent landed for the same company within a day of each other. One had a headline enterprise value of 42 million dollars. The other had 38. The founder called me before he had finished reading the second one and told me the decision was obvious. It was not. The 42 put nine million into a three year earnout tied to EBITDA targets that assumed a growth rate the company had hit exactly once, held back another two and a half million in escrow for eighteen months, and required the founder to roll 20 percent into the new entity. The 38 was all cash at close except for a one million dollar indemnity holdback, with a six month transition and no rollover. On the day of closing, the lower offer wired more money. On any realistic view of the earnout, it stayed ahead. The founder had been comparing the only two numbers on the front page, which is what almost every founder does, and it is the advisor's job to stop that comparison before it becomes a decision.
An LOI is not a price. It is a structure with a price printed on it, and the structure decides what fraction of that price the seller ever sees. Comparing offers properly means normalizing everything back to a common unit, and the only honest common unit is cash actually received, adjusted for when it arrives and how likely it is to arrive at all. That takes an afternoon of work and a spreadsheet the founder can follow line by line. I have never once regretted spending that afternoon, and I have watched sellers who skipped it spend the next two years discovering what they agreed to.
Start with cash at close, because that is the only number in any letter of intent that is close to certain. Take the headline enterprise value and subtract every deduction the letter either states or implies. Funded debt and capital leases come out. Transaction expenses come out. Escrow and indemnity holdbacks come out of the wire even though they are still nominally the seller's money. Any seller note comes out, because that is the seller financing the buyer. Rollover equity comes out, because that is the seller reinvesting rather than being paid. What is left is the number that hits the account on Friday, and it is routinely 20 to 35 percent below the headline in lower middle market deals. Two offers with a four million dollar gap on the front page can flip entirely at this line. Run it for every offer on the table, put the results side by side, and the conversation changes character immediately.
Next, discount the contingent money rather than counting it. Earnout dollars are not deferred purchase price, they are a bet on a business the seller will no longer control, placed with a counterparty who writes the rules. When I score an earnout I ask three questions. What is the metric, who calculates it, and what happens to it if the buyer makes ordinary business decisions. An earnout on EBITDA in a company the buyer is about to load with management fees, shared service allocations, and integration costs is worth a fraction of its face value. An earnout on revenue is cleaner but still vulnerable to a buyer redirecting sales effort. An earnout with no protective covenants, no seller access to the books, and no acceleration on a change of control is closer to a lottery ticket than an asset. I do not tell founders an earnout is worthless. I tell them to write down the probability-weighted number they actually believe, defend it out loud, and then compare offers on that number instead of the face amount.
Then look at the conditions, because an offer is only worth what it is likely to close at. A letter of intent from a fund with committed capital and a signed financing commitment is a materially different instrument from one that is subject to obtaining debt financing on terms satisfactory to the buyer. So is one from a strategic acquirer whose board has already approved the acquisition versus one where board approval is a listed condition precedent. The financing contingency, the board approval contingency, and the scope of confirmatory diligence are the three conditions that most often turn a signed LOI into a wasted quarter. An advisor should be reading the conditions section before the price section, and should be willing to tell a founder that the higher offer is also the more speculative one.
The exclusivity period is the term founders skim and advisors should not. Signing an LOI means shutting off every other buyer for a defined window, and every additional week of exclusivity is leverage transferred from seller to buyer. A 45 day exclusivity with a defined diligence work plan is a very different concession from a 120 day exclusivity with automatic extensions. I look for a defined end date, no automatic renewal, and ideally a milestone structure that lets the seller walk if the buyer misses agreed checkpoints. If two offers are otherwise close and one demands twice the exclusivity, that is a real cost, not a formality. This is the same asymmetry I have written about in when a founder brings you an unsolicited offer, where the entire risk is agreeing to exclusivity before there is any competitive tension to lose.
The indemnity package is where a lot of value quietly moves. Compare the survival periods, the cap, the basket and whether it is a deductible or a tipping basket, and which reps are carved out as fundamental. A 38 million dollar offer with a 1 percent cap and a twelve month survival can be worth more than a 42 million dollar offer with a 15 percent cap and a two year survival, because the second one leaves a meaningful slice of the price exposed for two years. Where a buyer proposes representation and warranty insurance, the analysis shifts again, and generally in the seller's favor, though the retention and the exclusions determine how much. I walked through how that instrument reshapes the negotiation in how reps and warranties insurance changes the advisor's job. The point for offer comparison is simple: a letter of intent that specifies an insured deal with a low retention has already given the seller something the other letter has not.
Working capital deserves its own line in the comparison because it is the most common place where an apparently identical offer is not. Two letters can both say the deal assumes delivery of a normalized level of net working capital, and mean two completely different amounts depending on the reference period. A twelve month trailing average in a seasonal business produces a different peg than a three month average taken at the seasonal peak, and the difference is a direct dollar for dollar adjustment to the purchase price. If a letter is silent on the methodology, that silence is not neutral. It is an open term the buyer will fill in during diligence, and it should be scored as a risk rather than as a blank.
Only after all of that do I look at what the founder actually wants from the outcome, and I look at it seriously rather than as a tiebreaker. Some sellers want maximum cash and a clean exit. Some want the business and the people to continue in a form they recognize. Some want to stay for five years and take a second bite on the rollover. These are legitimate objectives and they change the ranking. A strategic buyer who plans to consolidate two facilities and eliminate 30 jobs may be the right answer for a founder who has already made peace with that, and the wrong answer for a founder who will spend the next decade running into former employees at the grocery store. The mistake is not having a preference. The mistake is discovering the preference after signing. This is why the buyer-type conversation belongs early in an engagement rather than at the LOI stage, a point I made in why most sellers pick the wrong buyer before diligence starts.
Then there is the buyer's own track record, which is data an advisor can actually collect. How many deals has this buyer closed in the last three years, and how many signed LOIs did they walk away from. Do they have a reputation for retrading price after diligence, and if so, at what stage and by how much. Who else has sold to them, and will those sellers take a call. A buyer with a documented pattern of signing high and closing low is not offering the number on the page, they are offering an option to negotiate down from it once exclusivity has removed the competition. Bidders like that are exactly why the highest headline in a process is sometimes the one to decline, and why the patterns that predict whether a deal closes at its LOI price are worth reading before the letter is countersigned rather than after, as I laid out in three patterns that predict whether a deal closes at the LOI price.
The mechanic that turns all of this from analysis into leverage is refusing to negotiate serially. The moment an advisor responds to one letter, the others start cooling. I hold competing bidders on the same clock, issue one written set of clarifications and requested improvements to each, and give them the same short deadline. Bidders should be told plainly, and truthfully, that they are in a competitive situation, and that the seller is evaluating structure rather than headline price. That single sentence, delivered credibly, has moved more terms in my experience than any amount of back and forth over enterprise value. Buyers who are serious will improve the terms that cost them the least and matter to the seller the most, which is usually escrow size, exclusivity length, and the earnout definition rather than the price itself.
The deliverable at the end of this is one page, and it should be one page. Rows for headline value, cash at close, contingent value at the seller's own probability estimate, dollars at risk in escrow and indemnity, exclusivity days, closing conditions, and fit against the founder's stated objectives. Columns for each bidder. Every number sourced to a specific clause in a specific letter so nothing in it is opinion. Hand that to a founder and the decision usually makes itself in about ten minutes, and it makes itself for reasons the founder can articulate to a spouse, a board, or a family shareholder who was not in the room. That defensibility matters more than advisors credit, because the offer a seller can explain is the offer a seller does not second-guess for the next three years.
The founder from the opening took the 38. Two years later the company missed the second-year target in the earnout schedule the other buyer had proposed, for reasons that had nothing to do with performance and everything to do with how the acquirer allocated corporate overhead across its portfolio. He would have collected a portion of the nine million and litigated over the rest. Instead the money had been in his account since closing week. Nothing about that outcome required brilliance. It required refusing to let the largest font on the page decide, and doing the arithmetic that turns two incomparable documents into one honest comparison. That arithmetic is a large part of what we do for founders before any letter gets countersigned at Cordis Group.