Before You Sign the LOI: Equity-to-Cash Checklist

You are about to sign a letter of intent that says your company is for sale. In 2025, 88 percent of private-target deals, or deals for private companies, used an escrow or holdback. Circle the date your equity becomes cash, not the headline price.

Sellers often read the LOI as a number. Read it as a payout schedule instead. Earnouts, escrows, holdbacks, indemnity periods, and working-capital adjustments decide how much of that price reaches your bank account.

Later money depends on the terms

Buyers often pay part of the price later. That later money depends on performance, claims, or a release date. Signing without reading those terms is agreeing to a payment plan you did not understand.

In 2025, 24 percent of private-target M&A deals outside life sciences included an earnout, versus 22 percent in 2024.

Earnouts: the buyer can move the metric

An earnout pays more only if a metric hits a target. Control decides the outcome. If the buyer can change pricing, cut marketing, or shift customers, the metric can move without your help. You need the operating budget, the key-customer list, and the metric definition.

A clean earnout clause leaves no room for buyer discretion. Silence on how the number gets measured turns the earnout into a negotiation, not a payment.

Escrow and post-closing terms can delay cash

An escrow or holdback keeps money after closing to cover claims. The release schedule matters most. A small escrow released quickly is not the same as a larger one released slowly.

In deals without representations and warranties insurance, the median escrow or holdback was 10.0 percent of transaction value, and the average was 12.1 percent. Representations and warranties insurance, which shifts some claim risk from the seller to an insurer, appeared in about 46 percent of 2025 private-target deals.

The seller indemnity period gives the buyer a window after closing to claim that a deal statement was wrong. In traditional indemnity deals, 11 percent had no post-closing window for general seller statements, down from 18 percent in 2024. A long indemnity period with a broad claims process can keep your escrow unavailable longer than you expect.

Working-capital adjustments, which compare closing cash and receivables to an agreed level, can also change the final price. Thirty-nine percent of working-capital purchase price adjustments used a worksheet approach. When working capital is left to a later worksheet, ask for the worksheet approach now.

The checklist protects your cash

Use this checklist before you sign. Keep it with the LOI, the term sheet, and the model. Each item is a quick yes-or-no test. A no means the LOI needs more terms.

• Earnout trigger: Does the payment tie to a named event, such as revenue, EBITDA, a common profit measure, customer retention, or a regulatory approval?
• Earnout metric: Is the metric tied to a source, a formula, and a data owner?
• Earnout period: Is the measurement period fixed, with no buyer discretion to extend or shorten it?
• Earnout target: Can you verify the target against historical results and a realistic operating plan?
• Earnout cap: Is the maximum earnout amount included in the total payout you are modeling?
• Earnout control: Does the buyer have a written operating budget, key-customer list, and marketing plan that protect the metric?
• Escrow size: Is the escrow or holdback stated as a percentage of transaction value, with a dollar cap?
• Escrow release: Is the release schedule tied to dates, not to the buyer's satisfaction?
• Claims process: Are claims limited to specific deal statements, with a deadline, a notice requirement, and a dispute step?
• RWI or indemnity fallback: When representations and warranties insurance is used, do the policy limits, exclusions, and the seller's claim share appear? If not, is the seller indemnity period short and the claim list narrow?

A LOI that cannot answer those questions is not ready to sign. Ask for the terms in writing, then recalculate the payout.