Letter of Intent

A letter of intent (LOI) is a usually non-binding document outlining the proposed terms of an acquisition, signed before the definitive agreement. Sometimes called a term sheet in M&A context or memorandum of understanding (MOU), it is signed before deep due diligence and establishes the headline price range, transaction structure, key conditions, and an exclusivity period during which the seller commits not to negotiate with other potential buyers. It is the document that turns a buyer's interest into a structured negotiation and the document founders most commonly misunderstand as a commitment to close.

The components of a typical LOI: headline price and structure (cash vs stock, all-cash vs earnout, fixed price vs collar), proposed deal structure (stock purchase vs asset purchase vs merger; tax and liability implications differ significantly), exclusivity period (typically 30 to 90 days during which the seller cannot solicit or accept competing offers; the most contentious term because it removes the seller's leverage), due-diligence scope and timeline, key conditions to closing (regulatory approvals, financing, key-employee retention, customer-consent thresholds), expense allocation (who pays legal/banker fees, who pays if the deal breaks for a specified reason), and what's binding and what isn't (typically only the exclusivity, confidentiality, expense-allocation, and law-and-venue clauses are binding; the price and structure are non-binding starting points). The exclusivity period is the most important leverage transfer: once the seller signs, they cannot run a competing process or pressure the buyer with alternatives, which is why buyers typically move from generous LOI terms to tighter definitive-agreement terms during exclusivity ("re-trades"). The defense is keeping the exclusivity window as short as practical (30 to 45 days when possible), requiring the buyer to meaningfully advance due diligence and definitive-agreement drafting during that window, and not signing an LOI that locks you in for 90+ days without good reason.

What founders get wrong: Treating the LOI as a commitment to close. The LOI's price and structure are non-binding starting points; the actual deal terms get re-negotiated over 6 to 12 weeks during definitive-agreement drafting, and the final price can move 10 to 30 percent in either direction depending on what due diligence reveals. The LOI is the start of negotiation, not the end.

Related: Acquisition · Definitive Agreement · Due Diligence · Earnout

FAQ

What is a letter of intent?
A usually non-binding document outlining the proposed terms of an acquisition, signed before the definitive agreement and before deep due diligence. Establishes the headline price range, transaction structure, key conditions, and importantly an exclusivity period during which the seller cannot negotiate with other buyers.

What's binding in a letter of intent?
Typically only the exclusivity, confidentiality, expense-allocation, and law-and-venue clauses are binding. The price and deal structure are non-binding starting points that get renegotiated during definitive-agreement drafting. Founders who treat the LOI's price as committed are usually surprised by the re-trade.

How long is a typical LOI exclusivity period?
30 to 90 days is the common range, with 30 to 45 days preferred from the seller's perspective. Longer windows give the buyer more time to re-trade terms or slow-walk the process; shorter windows force the buyer to advance due diligence quickly. The exclusivity period is the most important leverage transfer in the LOI.