Letter of Intent (LOI)
A non-binding document outlining the key terms of a proposed business acquisition — including price, structure, and conditions — before a definitive agreement is drafted.
What is a Letter of Intent?
A Letter of Intent (LOI) is the first formal step toward closing a business sale. It's a document signed by the buyer and seller that summarizes the proposed deal terms before lawyers draft the full purchase agreement.
Despite being mostly non-binding, LOIs are significant — they signal serious intent, set the negotiating framework, and typically include a no-shop clause that prevents the seller from entertaining other offers for a defined period.
What's in an LOI?
A typical LOI covers:
- Purchase price — total consideration (cash at close + earnout + seller note)
- Deal structure — asset sale vs. stock sale
- Working capital target — what balance sheet state is expected at closing
- Earnout terms — any performance-based payments post-close
- Due diligence period — how long the buyer has to investigate
- Exclusivity (no-shop) — typically 30–60 days where the seller can't market to others
- Closing timeline — target date for signing the definitive agreement
- Key conditions — financing contingencies, regulatory approvals, etc.
Is an LOI Binding?
Most provisions in an LOI are non-binding — meaning either party can walk away without legal consequences. However, certain clauses are typically binding:
- Exclusivity / no-shop clause — seller agrees not to solicit other buyers
- Confidentiality — both parties agree to protect shared information
- Break-up fees — if included, these can be binding
LOI Negotiation Tips for Sellers
Don't sign away too much exclusivity. 30 days is reasonable; 90 days is too long before you've seen the full offer in writing.
Address earnout terms carefully. An LOI that looks good on price but loads up on earnouts may be worth less than a lower cash offer.
Keep competing offers alive. The moment you sign an LOI and accept exclusivity, your leverage drops. Get the best LOI you can before signing.
Work with an M&A attorney. Even though an LOI is non-binding on price, it sets the tone for the entire negotiation. Conceding too much early is expensive.
LOI vs. Term Sheet
The terms are often used interchangeably. "Term sheet" is more common in venture capital and real estate; "Letter of Intent" is the standard term in M&A transactions.