This article is a guest post by Tatjana Paterno, a member of Bass, Berry & Sims, PLC. The views expressed are solely those of the author.

Although the M&A market in the first half of 2025 did not accelerate as expected due to ongoing economic uncertainty,M&A professionals remain optimistic about the second half of the year. According torelevant datadeal volume in March increased compared to the same period in 2024, particularly in the technology and consumer goods sectors.With expected increases in M&A activity and rising pressure for successful exits, more CFOs are under pressure to facilitate deals that drive growth while minimizing financial risk for both buyers and sellers. A well-drafted letter of intent (LOI) is the foundation of a successful acquisition, setting the tone for negotiations and protecting company margins. However, a poorly structured LOI or ineffective representations and warranties can lead to cash flow surprises, undervalued deals, or extended exclusivity periods that drain resources.

In an environment of economic uncertainty and tightened budgets, CFOs who master the LOI process and leverage representations and warranties clauses are essential to maximizing return on investment and ensuring long-term value. The following five strategies can help CFOs optimize the LOI and acquisition agreement process, enhance deal confidence, protect liquidity, and gain an edge for their organizations in a competitive market.

1. Clarify cash-free, debt-free terms to protect cash flow

One of the most common pitfalls in an LOI is ambiguity regarding whether the transaction is "cash-free, debt-free." A buyer may require the target company to close on a "debt-free" basis but remain silent on cash, expecting to receive some of the company's cash reserves. This can erode the purchase price and harm the seller's interests.

Selling CFOs should proactively raise this issue, requiring explicit language that the transaction is "cash-free and debt-free," ensuring the buyer assumes liabilities but does not take company cash. While lawyers can identify this issue, they may not be involved at the LOI stage. If the target company is bound by exclusivity obligations after the LOI is signed, the buyer may gain the upper hand and even walk away with company cash. To avoid this, the LOI should clearly define terms, for example: "The transaction is cash-free and debt-free, with all cash retained by the seller at closing." Clear definitions protect liquidity and ensure fair valuation.

2. Define working capital adjustments for a smooth transition

Working capital adjustments can make or break a deal's financial outcome. Often, when signing an LOI, parties defer setting a specific working capital target amount (i.e., the working capital the buyer expects to receive with the business, equal to current assets minus current liabilities), merely stating a "normalized" working capital level. This is common when the buyer has not yet completed financial due diligence and needs more target company data.

However, if the final working capital target is set too high (exceeding the target company's normal needs), the buyer may effectively reduce the purchase price the seller receives. Buyers may also delay proposing a specific target amount to gain greater negotiating leverage later, reducing seller proceeds. Selling CFOs can require that both parties agree to propose a working capital target within a specific time after signing the LOI (e.g., four weeks) to lock in key financial terms early. Additionally, sellers can consider defining what "normalized" working capital means to align on methodology and reduce the buyer's ability to "stake claims" later. For businesses with revenue fluctuating due to cyclical factors like consumer behavior, weather, or holidays, the working capital target can be defined as a 12-month average.

3. Manage representations and warranties insurance (RWI) costs and liabilities

For larger deals (e.g., purchase price exceeding $20 million), consider negotiating the use of representations and warranties insurance (RWI) at the LOI stage. RWI transfers the risk of unknown issues from the seller to the insurer. Compared to deals without RWI (where sellers typically bear liability equivalent to 7%-20% of the transaction value for non-fundamental breaches, and must set aside 10%-15% in escrow at closing), RWI deals can significantly reduce or eliminate seller indemnification, escrow, and holdback requirements (with RWI, escrow is only 0.5%-1%).

RWI also benefits buyers, allowing broader representations and longer survival periods, but it incurs premium costs (2%-6% of the coverage amount) and underwriting requirements, typically slightly increasing the buyer's transaction costs. If both parties agree to use RWI, the LOI should specify who bears the costs. RWI premiums and other costs can exceed $100,000, depending on deal size. If responsibility is unclear, the seller may be forced to bear some or all of the costs, eroding deal proceeds. Selling CFOs should push for the buyer to bear RWI costs, especially in competitive markets. For example, in a recent deal, a seller saved hundreds of thousands of dollars by including in the LOI that "the buyer shall bear all RWI-related costs," a clause that was ultimately reflected in the final transaction documents.

4. Understand exclusivity clauses to mitigate risk

Exclusivity clauses in an LOI can prevent a seller from contacting other buyers for months. Buyers often seek longer exclusivity periods to lock in a deal, but this can burden the seller's operations, especially if the buyer walks away after months of intensive due diligence. Selling CFOs should carefully review exclusivity clauses, ensuring the initial exclusivity period and automatic extensions are limited (e.g., an initial period of 30-45 days, with only one 7-day or 15-day extension allowed).

For example, one of our clients recently avoided a six-month exclusivity trap by limiting the exclusivity period to 45 days (with no automatic extension), allowing them to pivot to other buyers when negotiations stalled. Additionally, consider including a clause that terminates exclusivity automatically if the buyer fails to meet due diligence milestones or attempts to renegotiate material deal terms. This protects the seller's negotiating power, drives process efficiency, and saves resources for other strategic priorities.

5. Bring in financial and tax due diligence experts early

Buying CFOs can add significant value by leading or supporting financial and tax due diligence. Early CFO involvement helps buyers identify financial issues, protect deal value, including ensuring financial statements comply with GAAP (or cash basis, if applicable), and clarifying key metrics like EBITDA. This is especially important in competitive deals using RWI, as RWI underwriters do not insure areas that the buyer or its advisors did not adequately investigate.

One of our clients brought in a tax due diligence team too late, resulting in their findings being delivered only after the deal closed. As a result, the buyer missed the opportunity to transfer risks identified in tax due diligence to the seller, and since RWI does not cover known issues, the buyer had to bear these risks itself. Whether buying or selling, CFOs should engage in due diligence early and collaborate with advisors to fully understand the financial and tax risks of the acquisition target.

CFOs can add value to the acquisition process in multiple ways, including clarifying cash-free, debt-free terms, defining working capital adjustments, managing RWI costs, confirming exclusivity clauses, and engaging in due diligence early. When reviewing your next LOI draft, keep these strategies in mind and ensure your team is aligned. In a market where every dollar counts, a well-structured LOI can determine whether a deal drives growth or drains resources.

CFOs can add value to the acquisition process in multiple ways, including clarifying cash-free, debt-free terms, defining working capital adjustments, managing RWI costs, confirming exclusivity clauses, and engaging in due diligence early. When reviewing your next LOI draft, keep these strategies in mind and ensure your team is aligned. In a market where every dollar counts, a well-structured LOI can determine whether a deal drives growth or drains resources.