When buying or selling a business, the Letter of Intent (LOI) serves as a critical roadmap. It outlines the proposed terms and conditions of a transaction before the binding agreements are finalized. However, one of the most pivotal moments in any deal occurs after due diligence is conducted. It's during this phase that unforeseen risks or opportunities may arise-often triggering the need to restructure the LOI or even revisit the deal structure entirely.
Contact us by either using the online form or calling us directly at 414-253-8500 for legal assistance navigating LOI revisions and complex deal structures.
Why Due Diligence Often Leads to LOI Revisions
The due diligence process is designed to uncover material information about the target business that may not have been disclosed during initial discussions. Depending on the findings, parties may need to revise the LOI to reflect:
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New financial realities
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Undisclosed liabilities
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Compliance issues
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Tax implications
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Contractual obligations
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Intellectual property concerns
Buyers and sellers alike should anticipate that an LOI may require changes, and both sides should view this as a normal and essential part of responsible deal-making.
Common Diligence Findings That Trigger Changes
Restructuring a deal post-diligence is not a sign of failure; it's a sign of vigilance. Here are some of the most common findings that lead to a modified LOI:
1. Undisclosed Liabilities
These can include pending litigation, environmental issues, or unrecorded debts. Depending on the severity, a buyer may:
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Adjust the purchase price
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Require an indemnity holdback or escrow
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Propose a different structure (e.g., asset sale instead of stock sale)
2. Inaccurate Financial Statements
If due diligence reveals overstatements of revenue or understated expenses, it may impact:
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Valuation
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Earn-out provisions
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Timing and manner of payments
3. Tax Exposure
Discovery of unresolved tax liabilities or unfavorable tax positions may prompt buyers to:
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Reframe the deal from a stock sale to an asset sale to avoid successor liability
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Request specific tax indemnifications
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Delay closing until issues are resolved
4. Problematic Contracts
Third-party contracts that contain anti-assignment clauses or termination rights triggered by a change in control can be major roadblocks. In these cases, buyers may:
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Push for an asset purchase to avoid automatic assignment
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Request seller efforts to renegotiate with third parties before closing
5. IP Ownership Issues
If the company's key intellectual property is not properly assigned or protected, this could necessitate:
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Pre-closing assignments or registrations
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Adjustments to valuation
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Conditions precedent to closing
Revising Deal Structure: Asset Sale, Stock Sale, or Merger?
When diligence findings change the risk or value of the deal, it may prompt a re-evaluation of the deal structure itself. Buyers and sellers may move from a stock purchase to an asset purchase, or even to a merger, to better accommodate:
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Tax efficiency
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Allocation of liabilities
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Assignment of contracts
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Ownership transition strategy
Learn more about these structures by visiting our pillar page: Structuring the Transaction: Asset Sale vs Stock Sale vs Merger
Legal Considerations When Restructuring the LOI
Any revisions to an LOI must be handled carefully to avoid creating enforceable obligations prematurely or unintentionally waiving rights. The revised LOI should clearly state:
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Which terms are binding (e.g., confidentiality, exclusivity)
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Which terms are non-binding (e.g., purchase price, structure)
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The timeline for negotiation of definitive agreements
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Updated deal milestones
Legal counsel should review any amendment or restatement of the LOI to avoid creating accidental enforceability of economic terms.
Timeline Implications: Delays and Resetting Expectations
Restructuring an LOI often resets the deal clock. Buyers may need more time to:
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Conduct follow-up diligence
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Re-negotiate third-party contracts
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Assess alternative deal structures
Sellers may need to manage internal expectations and preserve the business's value during this extended timeline. In some cases, the parties may need to draft a new LOI altogether if the changes are extensive.
Renegotiating Key Economic Terms
After significant diligence revelations, both parties may seek to re-negotiate core economic terms. The most frequently adjusted components include:
1. Purchase Price
The most direct response to new risks or liabilities is a reduction in purchase price. Adjustments may be:
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A flat reduction
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A tiered or deferred payment system
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Linked to milestone performance (earn-outs)
2. Earn-Outs and Contingent Payments
In scenarios where valuation is disputed due to uncertain future performance or newly discovered risks, earn-outs serve as a middle ground. They tie part of the purchase price to future revenue or EBITDA metrics-mitigating buyer risk while giving the seller a path to recover value.
3. Holdbacks and Escrows
To address concerns over post-closing liabilities or indemnification obligations, deals often include:
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Escrow accounts (a portion of the purchase price held temporarily)
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Indemnification caps or baskets
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Survival periods for representations and warranties
Preserving Leverage and Deal Momentum
Diligence findings can strain trust between the parties. It's essential to preserve negotiation momentum while protecting legal and financial interests. Strategies include:
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Framing LOI changes as necessary adjustments, not adversarial demands
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Maintaining a spirit of collaboration and transparency
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Using deal milestones and updated term sheets to re-anchor expectations
Sellers especially must guard against buyer fatigue, where too many changes or delays could cause the buyer to walk away entirely.
When to Walk Away: Red Flags That Kill Deals
Not all diligence discoveries can be cured by restructuring. If the risks are existential or reflect fundamental misrepresentations, walking away may be the best option. Deal-killing red flags include:
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Fraud or intentional misstatements
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Regulatory violations with criminal exposure
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Deep insolvency or undisclosed debt
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Systemic HR or compliance failures
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Loss of key customers or contracts during diligence
In such cases, buyers should consult legal counsel immediately regarding their rights and obligations under the LOI and confidentiality agreements.
Strategic Use of the LOI in Future Transactions
Experienced buyers and sellers can use insights from past LOI restructuring experiences to draft better LOIs in future deals. Proactive strategies include:
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Including built-in flexibility for deal structure revisions
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Clearly defining the non-binding nature of economic terms
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Setting expectations around post-diligence pricing reviews
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Outlining the process for modifying the LOI upon discovery of material issues
Contact an Attorney for Deal Structuring and LOI Restructuring
If you're involved in a transaction and face unexpected diligence findings, legal guidance is essential. A knowledgeable attorney can help you:
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Evaluate the risks and benefits of modifying your LOI
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Choose the optimal deal structure based on revised information
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Draft a revised LOI or re-structure the transaction safely
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Ensure compliance with contractual and fiduciary obligations
Contact Heritage Law Office for guidance on LOI negotiations and deal structuring. Call 414-253-8500 or reach out online to schedule a consultation.
Frequently Asked Questions (FAQs)
1. What are common reasons a Letter of Intent (LOI) changes after due diligence?
Due diligence may reveal financial discrepancies, hidden liabilities, tax issues, or contract complications that impact the terms of a transaction. These findings often lead to adjustments in deal structure, purchase price, or closing conditions.
2. Can an LOI be legally binding even if marked as non-binding?
Yes, certain provisions of an LOI-such as confidentiality, exclusivity, and governing law-can be binding even if the overall document is labeled non-binding. It's important to clearly distinguish between binding and non-binding clauses when drafting or revising the LOI.
3. What's the difference between an asset sale and a stock sale in a restructured deal?
In an asset sale, the buyer purchases specific assets and assumes selected liabilities. In a stock sale, the buyer acquires the ownership interests (e.g., shares) of the company, inheriting all assets and liabilities. Each structure has different legal, tax, and risk implications, especially after diligence findings.
4. How can buyers protect themselves when major issues are uncovered during due diligence?
Buyers can renegotiate the LOI to include:
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Lower purchase prices
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Indemnification clauses
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Escrow arrangements
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Conditions precedent
- They may also shift to an asset purchase or include earn-out provisions to mitigate risk.
5. Is it normal for a deal to slow down after due diligence?
Yes, it's common for the transaction timeline to shift. Post-diligence negotiations, legal reviews, and third-party consents can all delay the closing. Proper planning, clear communication, and updated LOI timelines help maintain momentum.