TLDR:
A Letter of Intent (LOI) is a preliminary document that outlines the proposed terms of a transaction—typically an acquisition, joint venture, or major commercial deal—before parties commit to drafting definitive agreements. The LOI signals serious intent to negotiate while preserving flexibility on most terms until full diligence is complete.
Binding vs. Non-Binding Provisions
Most LOIs are intentionally hybrid documents: substantive commercial terms (price, structure, key conditions) are typically non-binding, signaling intent without locking parties in; certain “process” terms are explicitly binding—exclusivity (no-shop), confidentiality, expense allocation, governing law and dispute resolution, and standstill obligations where relevant. Careful drafting separates the binding and non-binding sections clearly to avoid disputes about which terms are enforceable.
Common LOI Contents
A typical M&A LOI covers: identity of parties and transaction structure (stock vs. asset purchase, merger), purchase price and any earn-out or escrow mechanics, key conditions to closing, anticipated timeline, exclusivity period (typically 30-90 days), confidentiality, expense responsibility, and termination rights. The LOI may also specify the buyer’s diligence access rights and pre-closing covenants restricting the seller’s ordinary-course business changes.
Strategic Considerations
From the seller’s perspective, LOIs reduce the negotiation leverage by establishing initial reference points and triggering exclusivity. Sophisticated sellers run competitive processes through banker-managed auctions, accepting LOIs only from finalists after multiple rounds of bidding. From the buyer’s perspective, LOIs lock in the deal and prevent competing bids during diligence—but also create reputational risk if walk-away occurs without good reason. Founders entering LOI negotiations should ensure key economic terms (price, earn-out, working capital adjustment, escrow) are addressed at LOI stage rather than left to definitive document negotiation where leverage has shifted.