Direct answer: A subject to clause in an LOI is an if-then condition that makes the purchase contingent on something being true or accurate. It can cover income, contracts, clients, revenue, employees, or paperwork — and any subject to clause is negotiable, not final.
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What A Subject To Clause Actually Means In An LOI
You read through the letter of intent contract and you hit some legalese. One of the most common pieces of legalese is the subject to clause. A subject to clause is an if-then statement. If what you said is true, then we will buy your company. If what you said is accurate, then we are willing to buy it. The clause makes the purchase contingent on the buyer verifying that your representations match reality.
Just so we are clear — I am not a doctor, attorney, marriage counselor, or therapist. But I am a taco enthusiast. The subject to clause is a way for the buyer to take a look at the company, the organization, and tie the offer to specific facts being confirmed.
The Six Categories Subject To Clauses Usually Cover
Subject to clauses can attach to almost anything inside the business, but six categories show up the most often:
- Income — subject to the income matching what was represented
- Contracts you have in place — subject to those contracts being valid, transferable, and accurate
- Clients — subject to the client list being real and not at risk of leaving
- Revenue — subject to the revenue number being verifiable
- Employees — subject to staffing being as represented
- Paperwork — subject to you providing accurate information in a timely manner, giving the buyer everything they want, look for, and need
Each one is a separate point of negotiation. Each one is something the buyer can use to come back later and renegotiate the deal if their verification turns up something different from what you said.
Every Subject To Clause Is A Negotiation Point
An LOI contract is a fancy term for a piece of paper — or a digital piece of paper — that we are going to negotiate off of. Subject to clauses are not final terms. They are opening positions. You have every right and responsibility to look at one and go — I am not going to do that. That is not the game I am going to play. I am going to redline that. I am going to change the subject to clause.
Sometimes you read a subject to clause and go, whoa, whoa. There are clauses out there so unreasonable they make you stop. I have personally seen two in my career where I thought — are you actually going to put that in there? When that happens, redline it.
For more on the redline process see what is a red line in an LOI contract.
The Counter Subject To — How Sellers Push Back
Here is the move most sellers miss. If the buyer puts a subject to clause in the LOI, you can put one in too. Subject to clauses run both directions. The buyer cannot dictate that the deal is contingent on twenty things from your side and zero things from theirs.
One of the things I like to do on my LOI is — when this deal is done, subject to us having the meeting we agreed to and everything being signed off, then we actually have sushi for dinner or tacos. It does not always have to be super serious. It can be fun. It can be something different. The point is the seller has the same right to add subject to clauses as the buyer.
The Stock Purchase Vs Asset Purchase Distinction
Where subject to clauses really come into being super importante, as I like to say, is when you are doing a stock purchase versus an asset purchase. The two purchase types create completely different levels of buyer concern, and the subject to clauses reflect that.
| Purchase Type | What Happens To Liability | Subject To Stringency |
|---|---|---|
| Stock purchase | You are assuming liability. Old co stays as old co and goes into the buyer’s portfolio. The buyer inherits everything — good and bad. | Heavy. Buyers want every detail verified. Expect long lists of subject to clauses covering financials, IRS status, material information, and contract validity. |
| Asset purchase | Old co goes away. All liability stays with the old owner. New co buys the assets clean. | Lighter. Buyer is not worried about as many things because the legal entity carrying the liability is left behind. |
The more stringent the subject to clauses, the more likely you are looking at a stock purchase. The lighter the clauses, the more likely you are looking at an asset purchase. For deep mechanics of each type, see stock purchase vs asset purchase in LOI contract and how selling works asset vs stock.
What Common Subject To Clauses Look For
As you read through the LOI, three categories show up in almost every subject to clause:
- Financials being in order — the buyer wants to confirm the profit and loss statements, balance sheet, and cash flow match what you represented.
- Material information being correct — anything you stated as fact during pre-LOI conversations needs to hold up under due diligence.
- No problems with the IRS — tax filings, payroll taxes, sales tax, and other IRS-touching items must be clean.
This connects to what is due diligence in an LOI contract — due diligence is the process buyers use to verify that the subject to clauses are satisfied.
If you are looking to sell your business in the next zero to thirty-six months, doing at least $2 million a year in revenue with a ten percent profit margin, the deal hotline is 888-DEAL-919. One of the team members will get back to you. No deal is too big.
What To Do When You Read A Subject To Clause You Don’t Understand
Subject to clauses can be one of those things where occasionally somebody throws some stuff in there that they should not. The protection is simple — go through the document deliberately. Grab the letter of intent. Print it out. Grab a highlighter. Be willing to write on it. Look at every clause and ask — what is this saying?
If you do not know a term, go to Google or some kind of AI tool. Look it up. Get the basic definition. Sometimes that will be enough to recognize there is an issue.
Why You Still Need An Attorney
If you need legal representation — which you absolutely should have looking at a letter of intent contract — ask them directly. Are these subject to clauses normal for my industry?
I was on the phone recently with an attorney for a big machinery deal I am working on. I asked, is this normal for this industry or service? He said, well, I do not know — hold on a second. He reached out to one of his friends and partners and they confirmed — for what you are looking at buying, this is normal.
I do not know everything. I admit, I do not know everything. The attorneys do not know everything either. The right move is to ask people who specialize in your specific industry. This connects to the LEAD Model — evaluating the deal in front of you requires the right specialists at the table.
Related cluster reading: what is a letter of intent, what is a non-binding LOI, what is a purchase price in an LOI, what is a closing date in an LOI.
Frequently Asked Questions
What is a subject to clause in an LOI contract?
A subject to clause is an if-then condition inside a letter of intent that makes the purchase contingent on something being true or accurate. The buyer is saying — if what you represented is verifiable, then we will move forward. It is the buyer’s mechanism for tying the offer to specific facts being confirmed.
What types of things do subject to clauses commonly cover?
Subject to clauses commonly cover six categories: income, contracts you have in place, clients, revenue, employees, and paperwork. Each one represents a verification point. Subject to you providing accurate information in a timely manner is the most common version covering the paperwork category.
Can you negotiate a subject to clause in an LOI?
Yes, every subject to clause is a negotiation point. An LOI is a fancy term for a piece of paper to negotiate off of. You have every right to redline a subject to clause, change it, or refuse it entirely. The clauses are opening positions, not final terms.
What happens when a subject to clause is unreasonable?
When a subject to clause is unreasonable, you redline it. Sometimes the buyer plants the flag and refuses to change. That can be a deal killer. New co may come in, take a look at your refusal, and decide — we are not doing a deal. Sometimes that is the right outcome.
How are subject to clauses different in stock vs asset purchases?
In a stock purchase, the buyer assumes all liability of old co. They want everything verified, so expect heavy subject to clauses. In an asset purchase, liability stays with the old owner. Subject to clauses are lighter because the legal entity carrying the risk is left behind.
Can you add your own subject to clauses as the seller?
Yes. Subject to clauses run both directions. If the buyer adds twenty conditions, you can add your own. The clauses do not belong only to the buyer. As the seller you have the same right to make the deal contingent on conditions you specify — even fun ones.
What is the “if-then” structure of a subject to clause?
The if-then structure is the core logic of every subject to clause. If what you said is true, then we will buy. If what you said is accurate, then the deal moves forward. The clause makes the buyer’s commitment conditional on the seller’s representations being verified.
What should you do if you don’t understand a subject to clause?
Print the letter of intent out. Grab a highlighter. Be willing to write on it. If you do not know a term, go to Google or an AI tool and look up the basic definition. Sometimes that alone will tell you whether there is an issue worth pushing back on.
Should you have an attorney review subject to clauses?
Absolutely. Ask your attorney directly — are these subject to clauses normal for my industry? If they are not sure, they should reach out to specialists in your industry to confirm. Even attorneys do not know everything about every industry, and the right move is to verify normality before signing.
Can subject to clauses include fun or non-serious conditions?
Yes. Subject to clauses do not have to be heavy legal terms. One example — subject to us having the meeting we agreed to and everything being signed off, then we have sushi or tacos for dinner. The point is the seller can add subject to clauses too, and they do not all have to be deal-critical.
Full Transcript
If you are a business owner and entrepreneur, and you got a letter of intent contract with subject to clauses, what are those and why do they matter? This is a fantastic question. I am Scott Sylvan Bell coming to you live from Consulting Secrets on a perfect day to talk about sales and business and a fantastic day to talk to you about subject to clauses.
You are going to read through your letter of intent, you are going to look through all the information, and there is going to be some legalese. Now remember, I am not a doctor, attorney, marriage counselor, or therapist, but I am a taco enthusiast. Subject to clauses means that we are going to take a look at the company, the organization. If what you said is true, then it is like an if-then statement. If what you said is true, then we will buy your company. If what you said is accurate, then we are willing to buy it.
Just know that these are all negotiation points. LOI contract is a fancy term for a piece of paper we are going to negotiate off of, or a digital piece of paper that we are going to negotiate off of. I have seen subject to clauses around a lot of stuff. It could be about income. A subject to clause could be about contracts that you have in place. It could be about clients. It could be about revenue. It could be about employees. Subject to you meeting all the requirements and all the data that we have asked for. I have seen it for like — here is tons of paperwork that we are going to need.
You absolutely positively should read through what the subject to clause says. A lot of times they are just a paragraph. This is subject to you providing us accurate information in a timely manner, giving us everything that we want, everything that we look for, and everything that we need. Sometimes you read a subject to clause and you are like, whoa, whoa. I have seen two in my career where I am like — are you going to actually put that in there?
Remember, an LOI is a fancy term for negotiation. You have every right and responsibility to look at and go — I am not going to do that. That is not the game I am going to play. I am going to redline that. I am going to change the subject to clause. Sometimes it might be a deal killer. Sometimes the company, new co, may come in and take a look and they are like — we are not doing a deal. This is something we are going to plant the flag on. We are not going to make any changes. We are not willing to do it.
If you are looking to sell your business in the next zero to thirty-six months, and you are doing at least $2 million a year in revenue with a ten percent profit margin, and you would like some help on the exit, reach out to the deal hotline, 888-DEAL-919. A member of my team will get back to you. We will reach out. We will see what we can do. We might be able to do something. We might not. I do not know.
Here is what you need to know. The subject to clause allows for you to say either we are going to do this or we are not. Think of it as a reason to break up. Think of it as a reason to renegotiate. Think of it as — hey, if it is going to be subject to this, you can flip it and say great, you have got a subject to clause, guess what? I am going to put one too.
For me, one of the things that I like to do on my LOI is when this deal is done, subject to us having the meeting that we have had and everything being signed off, then we actually have sushi for dinner or tacos. It does not always have to be super serious. It can be fun. It could be something that is just different that you do.
As you go through and you look at a letter of intent contract, start looking at the legal things. What is it subject to? It is subject to the financials being in order. It is subject to material information being correct. It is subject to no problems with IRS.
Where this really comes into being super importante, as I like to say, is when you are doing a stock purchase versus an asset purchase. In a stock purchase, you want to make sure that everything in that company is going good because you are assuming liability. We bought old co and it is going to stay in old co, and old co is going to go into the portfolio. Be aware that this is a common thing that comes up where people will be like — subject to all of these things being perfect and in a condition. The more stringent it is for the reasons that they are buying.
As an asset purchase, you do not really have to worry as much. You do not have to say — hey, I am worried about these things — because that old co is going away and all the liability goes with old owner. New co, different story, especially if I am buying the stock.
So subject to clauses can be one of those things where occasionally somebody throws some stuff in there that they should not. Grab the letter of intent, print it out, grab a highlighter, be willing to write on it, look at it and say — what are all these things? If you do not know the term, you can always go to Google or some sort of AI tool and take a look and say — hey, what is going on here? What is the information? What do we need to know?
Sometimes it will be like, hey, there is an issue. But if you need legal representation, which you should absolutely have looking at a letter of intent contract, ask them — say, hey look, are these subject to clauses normal? I was on the phone recently with an attorney for a big machinery deal that I am working on, and I said — hey, is this normal for this industry or service? He said, well, I do not know, hold on a second. He reached out to one of his friends and partners and they said — hey, for what you are looking at buying, this is normal. I do not know everything. I admit, I do not know everything.
