A letter of intent to buy a company names one headline price, and the money behind it arrives in parts: cash at closing, amounts held back, a seller note, and payments that depend on how the business does after the sale. In the sale of Appriva Medical, the merger agreement promised $50 million at closing and tied $175 million to four regulatory milestones (ev3, Inc. v. Lesh). The page covers practice in the United States as general information, not legal or tax advice.
The page does not cover how to answer or negotiate a letter, how a buyer arranges financing beyond the rules that reach the letter itself, or what a company is worth.
The parts of a price
A letter for a small company usually combines some of these parts:
| Part | When the seller is paid | What it depends on |
|---|---|---|
| Cash at closing | The day the sale closes | The sale closing |
| Escrow or holdback | After a period named in the letter | No claims made against it |
| Seller note | Over years, on a payment schedule | The buyer paying |
| Earnout | After closing, if targets are met | How the business performs under the new owner |
Two made-up letters side by side
Invented numbers: two letters for the same company.
| Letter A | Letter B | |
|---|---|---|
| Headline price | $1,200,000 | $1,400,000 |
| Cash at closing | $1,000,000 | $700,000 |
| Held back from that cash for 12 months | $100,000 | None |
| Seller note | $200,000 over 5 years | $300,000 over 7 years |
| Earnout | None | Up to $400,000 over 3 years, tied to revenue targets |
| Settled at closing with no conditions | $900,000 | $700,000 |
| Depends on the business after the handover | $0 | $400,000 |
Letter B's headline is $200,000 higher. It pays $200,000 less at closing with no conditions, lends the buyer $100,000 more through the note, and places $400,000 on targets measured after the seller has handed over control. Which letter pays more depends on the note's interest and security and on how the earnout is measured, and neither letter says yet.
How a price moved into milestones
According to the Delaware Supreme Court's opinion in ev3, Inc. v. Lesh, ev3, a medical device company, first offered $190 million for Appriva, with $115 million up front and the rest due when Appriva's heart device reached regulatory milestones. During negotiations ev3 grew concerned about the cost and risk of getting the device approved, and it sought to cut the up-front payment and raise the milestone payments. The final merger agreement promised $50 million at closing and made $175 million contingent on four milestones, each worth $50 million or less, with deadlines running to January 1, 2009.
The milestones were not met, and the former shareholders sued. A jury awarded them $175 million, the full milestone amount. On September 30, 2014, the Delaware Supreme Court reversed the order denying a new trial and sent the contract claim back for retrial. The last milestone deadline had been January 1, 2009, more than five years before that decision.
An earnout pays only if the targets are met
An earnout is a promise of more money after closing if set performance targets are reached. A 2018 post by Fried Frank lawyers on the Harvard Law School Forum on Corporate Governance notes that a buyer generally has no implied duty to maximize an earnout, though it may not act to frustrate the targets (Harvard Law School Forum on Corporate Governance, February 10, 2018). The same post notes that an earnout often settles a price dispute at signing and starts a new one after closing, and it recommends clear, specific provisions for how the earnout is calculated.
The earnout clause in the purchase agreement either names each of these or leaves it open for the kind of dispute the post describes:
- The measure: revenue, gross profit, jobs completed or something else.
- The accounting rules used to calculate it.
- The period over which it is measured.
- Who prepares the earnout statement and when.
- What happens if the buyer merges the crews into another company or drops a service line.
- How a disagreement over the number is settled.
A seller note makes the seller a lender
A seller note lends part of the price to the buyer. The note's interest rate, term, first payment date, security, and place behind any bank loan decide what it is worth.
When the buyer pays with an SBA 7(a) loan, two rules in the SBA's standard operating procedure, SOP 50 10 reach into the letter. Seller earnouts are prohibited in a change of ownership financed that way, so a buyer using such a loan could not offer Letter B's earnout. A seller note counts toward the buyer's required equity only on full standby, with no payments of principal or interest for the term of the loan, and even then it can supply no more than half of that equity. Moneybender's guide to how a seller note works inside an SBA acquisition loan covers the standby rules in full.
The working capital target can move the price at closing
Many letters state the price on the assumption that the business hands over a normal level of working capital: roughly, receivables and inventory and other current assets, less payables and other current liabilities. The purchase agreement then sets a target. If the working capital delivered at closing falls short, the price goes down by the difference; if it comes in above, the buyer pays more.
Chicago Bridge and Iron sold its nuclear construction subsidiary to Westinghouse for a price of zero, adjusted after closing against a working capital target of $1.174 billion (Chicago Bridge and Iron Co. N.V. v. Westinghouse Electric Co.). On April 28, 2016, Westinghouse's closing statement put the subsidiary's working capital at negative $976.5 million, more than $2 billion below the target, so Chicago Bridge would have owed Westinghouse over $2 billion. Most of that claim challenged accounting that Chicago Bridge had used in its financial statements all along. On June 27, 2017, the Delaware Supreme Court held that the adjustment was a narrow remedy for changes between signing and closing, measured with the same accounting as those statements.
For a company whose work runs by season, the months used to set the target change the dollar figure. A target written into a letter as a dollar amount, with the months it was averaged over, can be recomputed from the company's own monthly balance sheets.
How the split across assets changes the tax
When the assets of a business are sold, the IRS treats the sale as a sale of each asset separately, and buyer and seller both use the residual method to allocate the price (IRS, Sale of a Business). Both generally report the split on Form 8594, across classes that include equipment, vehicles and land (Class V) and goodwill and going concern value (Class VII) (IRS, Instructions for Form 8594).
For a company that owns trucks and heavy equipment, the split between Class V and Class VII changes what the seller keeps after tax. Gain on equipment is taxed as ordinary income up to the depreciation already allowed on it (IRS Publication 544), so moving part of the price between equipment and goodwill changes how much of the seller's gain is ordinary income.
The parts of the letter that bind
The Appriva letter of intent marked three provisions as binding: confidentiality, transferability and Appriva's talks with other buyers. The rest, including ev3's statement that it would commit to funding the milestones, was marked nonbinding (ev3, Inc. v. Lesh). The Delaware Supreme Court held that the merger agreement's mention of the letter did not turn that nonbinding funding promise into a binding one.
The restriction on talking to other buyers is usually called exclusivity or a no-shop clause. The same opinion, quoting a treatise on acquisitions, describes a no-shop provision as the seller's agreement to deal only with the buyer for some period of time. It adds that once a definitive agreement is signed, a confidentiality duty often continues to bind the parties, while limits on the seller's talks with other buyers tend to move into the definitive agreement itself.
Sources
- Supreme Court of the State of Delaware, ev3, Inc. v. Lesh, No. 515, 2013, decided September 30, 2014.
- Supreme Court of the State of Delaware, Chicago Bridge and Iron Co. N.V. v. Westinghouse Electric Co. LLC, No. 573, 2016, decided June 27, 2017, revised June 28, 2017.
- Gail Weinstein, Robert C. Schwenkel and David L. Shaw (Fried, Frank, Harris, Shriver and Jacobson LLP), The Enduring Allure and Perennial Pitfalls of Earnouts, Harvard Law School Forum on Corporate Governance, February 10, 2018.
- U.S. Small Business Administration, SOP 50 10, Lender and Development Company Loan Programs, version 8 with technical updates (effective June 1, 2025) and version 8.1 with Technical Policy Updates (published September 25, 2026, effective October 1, 2026), Appendix 15.
- Internal Revenue Service, Sale of a Business, page last reviewed February 10, 2026.
- Internal Revenue Service, Instructions for Form 8594, revised November 2021.
- Internal Revenue Service, Publication 544, Sales and Other Dispositions of Assets, for use in preparing 2025 returns.