What Is a Letter of Intent (LOI) in M&A?
The LOI is one of the most important documents in an M&A process — and one of the least understood by sellers going through a deal for the first time. Here's what it is, what it does and doesn't bind you to, and what to watch for.
Key Takeaways
- ✓An LOI outlines the key deal terms before the formal purchase agreement
- ✓Most LOI terms are non-binding — the price and structure can still change in diligence
- ✓Exclusivity clauses in LOIs prevent sellers from talking to other buyers during diligence
- ✓LOI negotiation sets the tone for the rest of the deal — get it right
In this guide
1What an LOI is and what it covers
A Letter of Intent — also called a Term Sheet or Memorandum of Understanding — is a document that outlines the key terms of a proposed acquisition before the formal legal agreement (Purchase Agreement) is drafted.
Typical LOI terms include:
- Purchase price and how it's structured (upfront, earnout, rollover equity)
- Deal structure (asset sale vs. stock sale)
- Exclusivity period — how long the seller can't talk to other buyers
- Due diligence timeline
- Key conditions to closing (financing, regulatory approval, etc.)
- Working capital adjustment methodology
2What is and isn't binding in an LOI
Most LOI terms are non-binding — they express intent but don't legally commit either party. This means the purchase price can change after diligence if the buyer discovers issues.
The binding provisions are typically:
- Exclusivity (no-shop clause): once signed, the seller cannot solicit or accept other offers for the exclusivity period
- Confidentiality: both parties agree not to disclose deal terms
- Expense allocation: who pays for what if the deal doesn't close
This asymmetry — non-binding price, binding exclusivity — is why LOI negotiation matters. Once you sign, you're off the market.
Signing an LOI with a long exclusivity period (90+ days) gives the buyer significant leverage. If diligence takes longer than expected, you're locked out of talking to other buyers while they revisit the price.
3What to negotiate in an LOI
Price and structure. The headline number matters, but so does how it's structured. An all-cash offer at $8M is worth more than a $10M offer with $3M in earnout.
Exclusivity length. 45-60 days is reasonable. 90+ days is long. Push back on excessive exclusivity periods.
Earnout terms. If there's an earnout, nail down exactly how it's calculated, what you have to achieve, and who controls the variables that determine payout.
Working capital peg. How working capital is defined and measured affects the final price. Get clarity on this before signing.
Representations and warranties. What you're promising about the business — and what happens if those promises turn out to be wrong.
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