Tool

LOI Economics & Risk Allocator

See how cash, stock, rollover, deferred payments, and closing conditions change the price, funding need, and risk of a deal.

What this helps you decide

How does the proposed structure change economics, control, and risk?

The decision this tool answers

Download the LOI Economics & Risk Allocator workbook · Excel · Version 1.0 · USD thousands

A headline price leaves important questions unanswered. How much reaches the seller at close? How much remains invested or depends on a future result? Which debt stays in the business? What cash must the buyer provide, and what must happen before either side commits?

This workbook turns a proposed letter of intent (LOI) into an inspectable economic bridge and a working list of conditions. Use it to understand the bargain before negotiating the details. It is an economics and decision tool, not a legal-document generator.

When to use it

Use it before agreeing core terms or exclusivity, when diligence changes the economics, and before final signing approval. It supports Gates 4–5 and 7–8 in The M&A Deal Workflow.

Start with a 10–15 minute first pass. The useful result is a price bridge you can explain, a visible funding need, and the few unresolved conditions that could change the decision.

What to bring

Bring the proposed enterprise value, debt schedule, eligible excess cash, working-capital definition and peg, cash and equity consideration, and any deferred or contingent payments. Identify which debt is repaid at close and which debt remains with the acquired business.

Also bring the committed debt expected to be drawn at close, available buyer cash, fees, additional operating cash, exclusivity dates, approval authority, and material consent requirements. For stock and rollover, identify the issuer, valuation basis, economic rights, and who controls the relevant decisions. An ownership percentage alone does not establish voting control.

Use USD thousands for monetary amounts. Follow the workbook’s separate units for share prices and shares. The filled example inputs are labeled Assumption. Replace them with the proposed deal terms. An explicit zero means the item was assessed as zero; a blank leaves the question open.

Your first 15 minutes

Define the price basis. Enter enterprise value, debt, eligible excess cash, and the working-capital peg. Check that the headline excludes the separately modeled contingent additions.
Allocate the fixed equity consideration. Specify stock and seller rollover, then review the residual cash amount. Separate funded escrow from an unfunded holdback.
Model the future payments. For each earnout or other contingent payment, enter the cap, payout if the condition occurs, probability, and timing. Review both expected value and the full entered obligation.
Check the cash. Compare closing uses with independently entered funding sources. Borrowing that has not been committed belongs among the open conditions.
Read the Downside case. Test the working-capital shortfall, stock movement, financing availability, added fees, and timing. Assign each unresolved issue an owner and an action before moving forward.

Downside is a buyer exposure case. Future payments can rise while funding becomes harder to obtain. Set the assumptions to test the structure’s weak points, rather than assuming every payment falls when the business performs poorly.

From enterprise value to seller consideration

Fixed seller equity consideration starts with headline enterprise value, subtracts total debt, adds eligible excess cash, and adds or subtracts the working-capital adjustment. The adjustment is closing working capital less the agreed peg. A shortfall reduces seller consideration under this convention.

The workbook deducts both repaid and retained debt when converting debt-free enterprise value to equity value. Their cash treatment then differs: repaid debt is a closing use of cash; retained debt remains a liability of the acquired business. Reclassifying the same debt should change closing funding, not quietly increase the seller’s equity price.

Keep the definitions consistent. Do not count cash or debt again inside working capital. The parties must agree which balances qualify, which accounting policies apply, and how the closing statement is prepared. The template’s convention must be reconciled with the actual transaction terms.

Cash, stock, and rollover change the bargain

Cash provides immediate liquidity only to the extent it reaches the seller. A funded escrow is cash paid into a separate account at close. An unfunded holdback is an amount the buyer retains for later payment. Both are portions of fixed cash consideration in this workbook, so neither is added to the purchase price a second time.

Stock requires a pricing mechanism. With fixed shares, the delivered value changes as the stock price changes. With fixed value, the share count changes to deliver the stated allocation. Review the issuer, valuation date, restrictions, and any collar separately. A lower quoted price can reduce the value the seller receives without reducing the buyer’s fixed cash payment.

Rollover leaves part of the seller’s consideration invested. It reduces the cash paid out, but it is still economic consideration. Identify the entity, security, distribution priority, future funding obligations, dilution exposure, and decision rights. Do not add ownership percentages in different entities or assume that a minority economic interest carries operating control.

Contingent value and payment risk

An earnout ties additional consideration to a future result. Other contingent payments can depend on a milestone or condition. The workbook shows an expected payment from the entered probability and payout if the condition occurs, its discounted value, and the aggregate caps. These are different views of the same obligation and must not be added together.

Expected value helps compare structures. It is not the amount the buyer can be required to pay. A low probability does not remove the need to fund a payment if the condition occurs. The cap view assumes all entered contingent caps are paid and uses the selected stock price. It is not an absolute ceiling on every possible deal cost.

Mike’s preference is to use earnouts when the continuing seller can influence the result. State the metric, accounting definitions, measurement period, operating authority, and the action required to deliver it. If revenue and EBITDA both matter, make the trade-off explicit. Moving revenue or costs between entities can change an earnout without improving the acquired business.

Escrow is not guaranteed recovery for a buyer, and a holdback is not cash already received by a seller. The actual release, claim, priority, and payment terms require agreement. This model does not assume that a possible claim reduces purchase price.

Price, closing funding, and future exposure

The economic enterprise-value equivalent adds debt back to delivered equity consideration and subtracts eligible excess cash. It includes the selected working-capital adjustment. The expected present-value view discounts the unfunded holdback and expected contingent additions. Funded escrow remains a full buyer cash outflow at close. The cap view retains the full nominal holdback and all entered contingent caps. These views are comparison measures, not an accounting fair-value calculation.

Closing cash uses separately include the fixed cash funded at close, debt repaid, fees, and additional operating cash the buyer must inject. Funded escrow consumes cash at close. An unfunded holdback and future contingent payments remain future cash needs. Retained debt remains debt exposure. The workbook conservatively funds closing uses from buyer cash and committed new debt. Eligible target cash stays in the acquired business and is not treated as an available closing source. Enter only the additional operating cash required beyond cash already retained. A structure that uses acquired cash at close needs a separately reconciled funds-flow schedule.

A funding gap is shown against separately entered sources. It is not erased with an automatic buyer-equity plug. New debt means committed funding expected to be drawn at close, not unused facility capacity. The private price ceiling is another independent input. Keep its basis consistent with the workbook’s enterprise-value comparison, including the working-capital adjustment.

Use the Synergy Underwriting & Value Bridge to evaluate buyer-created benefits and any deliberate seller sharing. Do not insert the same synergy into standalone value and consideration again.

Give conditions an owner and a consequence

Record the financing condition, required approvals, seller authority, key consents, and material operating dependencies. For each item, name who bears the risk, the evidence needed, the responsible owner, the due date, and the agreed resolution. A status marked complete does not substitute for those prerequisites.

Use Investigate, Price, Protect, or Walk. Investigate a missing fact. Change price when the economics change. Seek a specific protection when an identified risk can be allocated. Walk when control cannot transfer, funding is unavailable, or the remaining downside breaks the mandate.

Exclusivity commits time and restricts alternatives. Use explicit start, end, and review dates. Identify the evidence and milestones expected during that period. The workbook’s elapsed days, remaining days, and entered daily process cost make time visible; they do not value every lost opportunity or determine whether an exclusivity provision is enforceable.

Mike’s governing judgment

Use the LOI to fix core economics: valuation, cash-free debt-free treatment, timing, exclusivity, and the principal structural assumptions. Do not negotiate every definitive-agreement provision before the buyer has tested the business.

Resolve a specific material risk early when it can change the willingness to proceed. Keep the private hard ceiling intact as terms move. Seller alignment, financing certainty, and transferability deserve as much attention as the headline price. Prior diligence spending does not justify an uneconomic commitment.

Common mistakes

Comparing the seller’s equity cheque with an enterprise-value ceiling.
Adding escrow or holdback to a price that already includes it.
Subtracting retained debt twice, or forgetting debt that stays in the business.
Counting target cash as both a funding source and a separate distribution.
Treating a probability-weighted earnout as the maximum future payment.
Calling stock and rollover cash equivalents without examining the issuer and rights.
Hiding a financing shortfall in a balancing input.
Granting more exclusivity without clear evidence milestones.
Marking a condition complete while its owner, evidence, or resolution remains missing.

What the result establishes

The result explains what the entered terms imply for seller consideration, closing funding, future payments, and unresolved conditions. It makes the economic effects of a proposed structure visible before the next commitment.

It does not establish market value, debt capacity, enforceability, tax treatment, purchase accounting, indemnity recovery, or a complete acquisition return. It does not model stock collars, complex security waterfalls, or all future operating and financing obligations. A balanced funding schedule does not prove that the combined business can survive weaker revenue and margins.

Carry the output into diligence and signing

Send the assumptions that could change price or structure to Before You Buy: Follow the Work. Reconcile debt, cash, working capital, accounting definitions, and consent requirements with the evidence.

Before signing, update the economics and preserve the approved version. Give the agreement and financing teams the specific terms and open questions to resolve. Carry operating obligations and earnout dependencies into After the Deal: Keep the Business Working, with receiving owners and Day 1 actions.

Version

Version 1.0. Updated September 10, 2026. Editable Excel workbook with a Dashboard, Base and Downside assumptions, consideration and funding calculations, contingent-payment analysis, and a conditions register. Entries stay in your downloaded copy.