GLOSSARY
What Is Letter of Intent? | Agency M&A Definition
A Letter of Intent (LOI) is a written document outlining the preliminary terms of a proposed acquisition, including price, deal structure, timeline, and key conditions. While mostly non-binding, certain provisions — typically exclusivity and confidentiality — carry legal weight. The LOI signals serious buyer commitment and moves the transaction from exploratory conversations into formal deal process.
Letter of Intent in Agency M&A
In agency M&A, the LOI is the moment a deal shifts from theoretical to real. Before the LOI, conversations are speculative — founders are fielding interest, sharing high-level financials, and gauging fit. Once a buyer issues an LOI, both sides commit meaningful time and resources to due diligence, legal review, and integration planning.
When selling a digital marketing agency, founders often receive LOIs that look deceptively simple — a two-page document with a headline number, a vague earnout structure, and a 60-day exclusivity window. This simplicity can be misleading. The terms sketched in the LOI set the negotiating frame for the entire deal. If the LOI states a 5x EBITDA valuation with a 30% earnout, the final purchase agreement will almost certainly orbit around those parameters. Sellers who negotiate aggressively at the LOI stage — pushing for clearer earnout metrics, shorter exclusivity, or working capital definitions — consistently achieve better final outcomes. Buyers evaluating a creative agency typically issue LOIs after reviewing two to three years of financials, a client list summary, and an initial management meeting.
How Letter of Intent Affects Agency Valuation
The LOI establishes the valuation anchor for the entire transaction. Research on negotiation dynamics shows that the first number on the table disproportionately influences the final price, making the LOI the most consequential document before the purchase agreement itself. Key valuation-related LOI provisions include the headline purchase price, the split between cash at closing and deferred consideration (earnouts, seller notes), working capital targets, and any price adjustment mechanisms. Sellers should pay close attention to whether the LOI references enterprise value or equity value — the difference can be hundreds of thousands of dollars once debt and cash adjustments are applied.
Example
A buyer issues an LOI to acquire a $3.2M-revenue content marketing agency with $640K adjusted EBITDA. The LOI proposes a purchase price of $3.52M (5.5x EBITDA), structured as $2.46M cash at closing (70%), a $528K seller note paid over 24 months, and a $528K earnout tied to retaining 90% of revenue through the first post-closing year. The LOI includes a 45-day exclusivity period and requires completion of due diligence as a condition to closing. The seller negotiates the earnout threshold down to 85% revenue retention and shortens exclusivity to 30 days before signing.
Related Terms
Further Reading
Ready to find out what your agency is worth?