Letters of Intent: What Actually Matters

An Interview with Viktor Lobov, Co-Founder & Managing Partner of Meliora Advisory.

A Note From Daniel Novela

The Letter of Intent (LOI) is often treated as a preliminary step, yet it quietly defines the trajectory of an entire transaction. While much of the market still views the LOI as flexible or non-binding, in practice it establishes the economic framework, negotiating leverage, and path to closing.

To explore how this plays out in real transactions, I sat down with Viktor Lobov, Co-Founder & Managing Partner of Meliora Advisory. From competitive processes to retrading dynamics, his perspective reflects what actually drives outcomes once multiple buyers are at the table.

Interview with Viktor Lobov, Co-Founder & Managing Partner of Meliora Advisory

Q1: When you’re running a competitive process and multiple buyers submit LOIs, what separates the letter that wins from the one that doesn’t, beyond headline price? What are sellers and their advisors actually reading for?

A: Price gets attention, but it rarely decides the outcome on its own. When we run a competitive process, we tell our clients to read the entire economic package and the certainty of closing, not just the headline multiple. One thing we emphasize to sellers is that the LOI is the last moment they truly have negotiating leverage. Once exclusivity is granted, the dynamic shifts significantly toward the buyer. Because of that, we push to make sure the LOI spells out the major economic terms of the purchase agreement in meaningful detail. There is a common misconception in the lower middle market that a shorter LOI is better because it keeps things flexible. In our experience, the opposite is true. The more vague the LOI is, the more room the buyer has to reinterpret economics during diligence.

What we look for first is structure – how much is cash at close versus rollover equity, earn-outs, or seller financing. Two identical prices can be very different deals depending on that mix. Second, we look closely at assumptions embedded in the LOI. Some buyers price aggressively but quietly include working capital adjustments, aggressive diligence conditions, or vague language around financing that gives them room to retrade later. Third is buyer credibility. We evaluate whether the buyer has actually closed deals of this size, whether financing is committed, and whether their diligence process tends to be constructive or adversarial.

The LOIs that win in our processes usually combine strong price, clean structure, minimal conditionality, and a credible path to closing. Sellers care about certainty almost as much as value, and we spend a lot of time helping them understand that distinction.

Q2: There’s a tension in every LOI between keeping terms non-binding to preserve flexibility and locking in enough detail to prevent re-trading later. How do you advise your sell-side clients on where to draw that line, and where do you see that tension create problems after signing?

A: We treat the LOI as the economic blueprint of the deal, even though most provisions are technically non-binding. In our view, the biggest mistake sellers make is signing an LOI that is too vague on key economics, because that vagueness almost always benefits the buyer later. So we push to lock down the items that matter most: purchase price mechanics, working capital methodology, treatment of debt and transaction expenses, rollover terms, and any earn-out structure. At the same time, we accept that certain areas need flexibility – things like reps and warranties, indemnities, and detailed legal mechanics are appropriately negotiated in the definitive agreements.

Where problems arise is when LOIs leave economic interpretation open. If the LOI does not clearly define the deal structure, the buyer effectively gets a second negotiation during diligence. Our philosophy is simple: we keep the document non-binding legally, but very precise economically.

Q3: Re-trading after LOI, where the buyer changes material terms during diligence, is one of the most common complaints sellers have. But sometimes the diligence genuinely justifies an adjustment. How do you distinguish between legitimate price adjustments and bad faith re-trading, and how do you advise your clients to respond?

A: Retrading happens in almost every deal to some degree, but the key question is whether the change is tied to new information or just negotiating leverage. If diligence uncovers something material that wasn’t previously disclosed (a customer concentration issue, margin erosion, working capital shortfalls, or an operational liability), we consider that a legitimate reason to revisit price or structure. In those cases, we work with the buyer to recalibrate the deal in a way that keeps the transaction moving.

Bad-faith retrading looks very different. It usually shows up as broad, late-stage pressure without new facts, often after the seller has granted exclusivity and lost negotiating leverage. One way we minimize that risk is by dealing primarily with reputable buyers who have a track record of honoring their LOIs. Experienced buyers understand that an LOI should not be retraded unless something materially changes during diligence. If a buyer develops a reputation for doing otherwise, they eventually stop getting invited into competitive processes. We also make sure the leading bidder clearly understands they are emerging from a competitive process. When buyers know there were multiple credible parties involved, they also know that if they start playing games without a real diligence basis, we have the ability to re-engage other bidders.

The best way to prevent retrading is actually earlier in the process: running a disciplined auction, disclosing information properly, selecting credible buyers, and making sure the winning bidder knows the process was competitive. That combination tends to keep negotiations grounded in facts rather than leverage.

Q4: If you could redesign the standard LOI process for lower middle market transactions, what would you change? What provisions or practices do you think are missing?

A: If we could redesign the process, we would push for more standardization around economic clarity at the LOI stage. Too many lower middle market LOIs are written at a very high level, which creates unnecessary friction later. We would prefer to see LOIs consistently include clearer definitions around working capital targets, treatment of cash and debt, transaction expenses, and rollover structures. We would also like to see buyers provide greater financing transparency earlier in the process. Sellers often grant exclusivity without fully understanding whether the buyer’s capital is truly committed. Finally, we believe processes should emphasize buyer quality as much as valuation. In the lower middle market especially, the difference between a buyer who reliably closes and one who struggles through diligence can determine whether a deal finishes or falls apart.

Our job as sell-side advisors is to structure processes that maximize value while protecting closing certainty, and a more disciplined LOI framework would significantly improve outcomes for sellers.

What This Means Going Forward

What emerges is a consistent theme: clarity early in the process is not restrictive, it is protective. The LOI, when approached with precision, becomes less of a placeholder and more of a strategic instrument that shapes both value and certainty.

In a market where execution matters as much as headline price, the difference between a smooth closing and a stalled deal is often decided long before definitive agreements are signed. The discipline applied at the LOI stage ultimately defines how the rest of the transaction unfolds.

Categorised in: News

This post was written by Daniel Novela