The NDA and Letter of Intent: What They Do and Don't Do

What the NDA is actually protecting

A non-disclosure agreement, often called a confidentiality agreement in this context, is the document a seller asks a prospective buyer to sign before receiving anything more detailed than a one-page teaser. Its core purpose is narrow: it says the buyer can use the information they're given only to evaluate the potential purchase, must keep it confidential, and must not disclose it to anyone else, or that the sale process itself is happening, without permission. It typically also requires the buyer to return or destroy the seller's materials if the deal doesn't move forward.

A well-drafted NDA usually goes further than basic confidentiality and includes a non-solicitation clause, which prohibits the prospective buyer from directly approaching the seller's employees to hire them, or the seller's customers or vendors to do business with them, for some period of time regardless of whether the deal closes. This matters because one real risk of sharing sensitive information with a buyer, especially a competitor, is that the deal falls apart but the buyer walks away having learned exactly who the best customers and employees are.

It's worth being clear-eyed about what an NDA cannot really do. It does not stop someone from remembering what they read, and it does not prevent a determined bad actor from acting on that knowledge quietly in ways that are hard to trace back to a violation. An NDA is a real legal document with real consequences for breaching it, but it is not a guarantee of secrecy, and it's rarely worth suing over unless the breach is clear and the damages are large enough to justify the cost of litigation. Its practical value is that it establishes a legal obligation, discourages casual misuse, and gives you a remedy if something egregious happens — not that it makes leaks impossible.

Term length and other details worth checking

NDAs typically run for one to three years from signing, though the right length depends somewhat on how sensitive the information is and how long it will remain competitively relevant. A non-solicit provision covering employees and customers often runs for a similar or slightly shorter period. If a buyer's proposed NDA has an unusually short term, or no non-solicit clause at all, that's worth raising before you sign it, not after you've already shared your customer list.

Also check who the NDA actually binds. If a buyer is a company rather than an individual, make sure the agreement covers the company's officers, employees, and any advisors or lenders they bring in to help evaluate the deal, since information often gets shared more broadly than the seller expects once due diligence starts. Many NDAs also include a clause stating that the existence of discussions itself is confidential, which matters a great deal to owners who don't want employees or customers hearing rumors of a sale before they're ready to announce anything.

When to release financials, and to whom

A sensible sequence protects the business while still giving serious buyers what they need to make a decision. Early on, a one-page teaser with no company name and rounded, high-level numbers is usually enough to gauge interest. Once a prospective buyer signs the NDA, it's reasonable to share a fuller confidential information memorandum with several years of financials, along with add-back detail supporting your seller's discretionary earnings or EBITDA figure.

Full detail — actual tax returns, granular customer-level revenue, detailed employee compensation, and similar sensitive material — is usually best held back until after a letter of intent is signed and exclusivity has begun. At that point, the buyer has put a specific price and set of terms on the table, which is a meaningful signal of seriousness, and you're negotiating from a position where you know roughly what's at stake in sharing more. Sharing your most sensitive data with someone who hasn't yet committed to a price, particularly a buyer who could plausibly be a competitor doing market research under the guise of acquisition interest, is one of the more common regrets sellers describe after the fact.

It's also reasonable to withhold certain especially sensitive items even during full diligence — for example, individual customer contact details or proprietary formulas — until very close to closing, and to redact or aggregate that information until then. A buyer with genuine intent to close will generally understand this; a buyer who pushes hard for that level of detail unusually early is worth a second look.

What a letter of intent contains

The letter of intent, sometimes called an LOI or term sheet, is the document that turns interest into a concrete proposal. A reasonably complete LOI typically covers the purchase price and how it's structured (cash at closing, a seller note, an earnout, or some combination); whether the deal is an asset sale or a stock sale; the buyer's financing plan, including whether an SBA loan or other lender approval is required; a working capital target or 'peg', meaning the amount of net working capital the seller is expected to leave in the business at closing, with an adjustment mechanism if the actual amount differs; a period of exclusivity during which the seller agrees not to negotiate with other buyers; a proposed timeline to close; and a list of conditions that must be satisfied before the deal can close, such as satisfactory due diligence, financing approval, a lease assignment, or landlord consent.

Good LOIs also address a handful of details that are easy to skip past but expensive to leave vague: what happens to the seller's employment or consulting role after closing, the length and scope of a non-compete, how any escrow or holdback will work, and who pays for what portion of closing costs. The more of this is specified now, in a document that's quick and cheap to negotiate, the less room there is for disagreement once expensive attorneys are drafting a sixty-page purchase agreement.

Binding vs. non-binding: reading the fine print

Most of an LOI's substance — price, structure, timeline, conditions — is deliberately non-binding. Neither side is legally obligated to close the deal on those terms, or at all, and that's by design: it lets both parties negotiate the big picture before spending real money on lawyers, accountants, and lenders to finalize it. A handful of provisions, though, are usually written to be binding regardless of whether the deal ultimately closes: confidentiality (often incorporating or extending the earlier NDA), the exclusivity or 'no-shop' clause, and sometimes a clause about who pays for due diligence costs if the deal falls through for a specified reason.

It's worth reading an LOI closely enough to know exactly which sections are labeled binding, because the practical effect is significant. If the price and terms are non-binding but exclusivity is binding, a seller who signs is committing to take the business off the market for the buyer's benefit without yet having any enforceable promise that the buyer will actually pay the stated price. That's a completely normal structure in this industry, but it's exactly why the exclusivity period, and what happens during it, matters as much as the price itself.

Exclusivity length, retrades, and how to reduce that risk

The exclusivity period is the window, usually somewhere between 45 and 90 days, during which the seller has agreed not to shop the deal or negotiate with other buyers while this buyer completes due diligence, lines up financing, and works toward a closing. A longer exclusivity period gives a buyer more time and reduces pressure to rush, but it also ties up the seller for longer with no guarantee of a closing, during which time other prospective buyers move on and the business's momentum in the market is lost if the deal ultimately falls apart. Shorter exclusivity keeps pressure on the buyer to move quickly but may not be realistic for a buyer who needs SBA loan approval, which commonly takes 60 to 90 days on its own.

A retrade is when a buyer, partway through or at the end of the exclusivity period, comes back with a lower price or worse terms than what was agreed in the LOI, often citing something they found in diligence, even when that something isn't especially surprising or material. Because most of the LOI's terms are non-binding, the buyer is usually within their legal rights to do this, and the seller's main leverage at that point is the threat of walking away and re-marketing the business, which is costly and slow after weeks or months spent off-market with this one buyer.

Sellers reduce, though don't eliminate, retrade risk in a few practical ways: getting as much specificity into the LOI as possible so there's less room to claim a surprise later; disclosing anything genuinely significant, positive or negative, before the LOI is signed rather than letting it surface during diligence; keeping exclusivity periods reasonably short and tying any extension to specific milestones being met; and vetting the buyer's seriousness and financing capacity before signing exclusivity at all, ideally through a broker or advisor who has seen how that buyer behaves in other deals. None of this fully prevents a retrade from a buyer determined to attempt one, but it removes much of the pretext a buyer would otherwise use to justify it.

What to nail down so diligence doesn't reopen the deal

The most effective way to prevent diligence from becoming a renegotiation is to put real numbers and real mechanics into the LOI rather than vague language. A working capital peg with an actual dollar figure and a description of how it will be calculated at closing is far harder to relitigate than a sentence saying the seller will 'leave sufficient working capital in the business.' Similarly, spelling out exactly which add-backs were used to calculate the earnings figure the price is based on, and attaching the supporting schedule, removes one of the most common sources of after-the-fact disputes, since a buyer's diligence team frequently challenges add-backs that were never clearly defined.

It also helps to state explicitly in the LOI which conditions are expected to be satisfied and by when, rather than leaving 'satisfactory completion of due diligence' as a completely open-ended, subjective standard. Some sellers negotiate language requiring that any request to change price or terms after signing be based on a specific, material issue discovered during diligence, rather than a general re-evaluation — this doesn't stop a determined buyer, but it gives the seller firmer ground to push back and, if necessary, walk away with a clear record of why.