Letter of Intent (LOI)

A letter of intent (LOI) — also called a term sheet, heads of terms, or memorandum of understanding in some jurisdictions — is the document a prospective buyer submits to formally express interest in acquiring a company at a specified price and under specified conditions. It is typically non-binding on economic terms but binding on certain procedural provisions, most importantly exclusivity.

Receiving an LOI is a significant milestone in a sell-side M&A process. It signals that a buyer has reviewed the CIM, formed a preliminary view of value, and is prepared to commit resources to formal due diligence. For the sell-side advisor, the LOI selection decision — which buyer or buyers to grant exclusivity to, and on what terms — is one of the most consequential judgment calls in the engagement.

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What an LOI Contains

A well-drafted LOI addresses the following terms:

Purchase price. The proposed enterprise value or equity value, and the form of consideration — cash, stock, or a combination. In many middle-market transactions, the initial LOI price is a range rather than a fixed number, reflecting the buyer’s view that due diligence may adjust the figure. Experienced advisors push for a tight range or a fixed number rather than accepting a wide preliminary range that signals uncertainty.

Deal structure. How the transaction will be structured: asset purchase versus stock purchase (or share purchase in non-US jurisdictions), merger, or recapitalization. The structure has significant tax implications for both buyer and seller and should be addressed, even preliminarily, in the LOI.

Working capital peg. The assumed level of working capital to be delivered at close, and the mechanism for adjusting the purchase price if actual closing working capital differs. Working capital peg negotiations are among the most frequent sources of post-signing disputes in M&A transactions. A clear LOI provision reduces this risk.

Earn-out provisions. If the purchase price includes a contingent component tied to future performance, the LOI should describe the earn-out structure, the relevant performance metric, the measurement period, and the payout cap. Advisors should be cautious about LOIs that defer all earn-out details to definitive documentation — these provisions become difficult to negotiate from a position of exclusivity.

Exclusivity period. The period during which the seller agrees not to solicit or negotiate with other buyers. Exclusivity is typically the only fully binding provision in an LOI. Standard exclusivity periods run 45–90 days, though buyers frequently request 90–120 days for complex transactions. Advisors should resist exclusivity periods longer than 60 days absent a clear justification, as extended exclusivity reduces seller leverage and delays alternative processes if the deal fails.

Key conditions to close. The material conditions the buyer requires before proceeding to definitive documentation: satisfactory due diligence, financing commitment (if applicable), regulatory approval, key employee retention agreements, or third-party consents.

Confidentiality. Confirmation that the confidentiality provisions of the NDA (signed prior to CIM access) remain in force through the LOI process.

Break fee or no-shop. Some LOIs include a break fee payable by the seller if the transaction does not close for seller-side reasons, or by the buyer if it walks away without cause. These provisions are more common in larger transactions and less standard in the middle market.

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Binding vs. Non-Binding Provisions

A common source of confusion — and occasionally disputes — is which LOI provisions are legally binding. The standard convention:

Provision	Typical Status
Purchase price	Non-binding
Deal structure	Non-binding
Working capital peg	Non-binding
Exclusivity	Binding
Confidentiality	Binding
Governing law	Binding
Break fee (if included)	Binding

The non-binding nature of the economic terms means that purchase price, structure, and conditions can change materially during due diligence — and often do. This is why advisors treat the LOI price as a starting point, not a committed outcome. Maintaining competitive tension through the LOI stage (by working multiple buyers toward parallel LOIs) is the primary lever for protecting final deal value.

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The LOI in the Sell-Side Process

In a typical structured sale process, LOIs are requested at the end of the first-round marketing phase. The sequence:

1. Process letter issued — formal bid instructions sent to second-round buyers, specifying the LOI format, required terms, and submission deadline
2. LOIs received — buyers submit indicative proposals, typically covering price, structure, and due diligence requirements
3. Advisor evaluation — the sell-side advisor presents the LOIs to the client, ranks them on price, deal certainty, and strategic fit, and recommends a preferred buyer or a short list for management presentations
4. Management presentation — shortlisted buyers meet the management team before submitting final bids
5. Final bids received — buyers submit revised and firmed-up LOIs following management presentations
6. Exclusivity granted — the seller selects the preferred buyer and enters exclusivity, during which formal due diligence commences and the data room is opened fully

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LOI Negotiation: What Advisors Watch For

Experienced sell-side advisors treat the LOI as a negotiation, not just a submission. Key issues to address before countersigning:

Price conditionality. Some buyers submit LOIs with price conditioned on results of financial due diligence, QoE review, or customer reference calls. Well-drafted LOIs define what would constitute a material adverse finding that permits price adjustment — and cap downward adjustments. Advisors should push back on open-ended price conditionality.

Exclusivity length. A buyer requesting 90+ days of exclusivity without a clear deal timeline is typically either uncertain about the transaction or planning to use the exclusivity period to re-trade. Advisors should propose a 45–60 day period with extension provisions tied to defined milestones.

Financing contingencies. LOIs from financial sponsors (private equity buyers) will typically include a financing condition. Advisors should require evidence of financing commitment (a debt commitment letter or equity commitment letter) before granting long exclusivity to a sponsored buyer.

Management retention. Some buyers condition the LOI on specific members of the management team agreeing to remain post-close. This can create friction if the seller has not yet discussed retention arrangements with management. The LOI should state that retention arrangements are to be negotiated in good faith post-exclusivity, not imposed as a condition to closing.

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LOI vs. Definitive Agreement

An LOI is a bridge to the definitive purchase agreement (also called the sale and purchase agreement, or SPA). Once exclusivity is granted:

• Formal due diligence commences in the data room
• Legal counsel begins drafting the SPA based on the LOI terms
• Working capital, representations and warranties, indemnification, and closing mechanics are negotiated in detail

The LOI sets the framework; the SPA defines the binding terms. Advisors who allow LOI terms to be vague or one-sided often find themselves renegotiating from a weak position once the definitive document drafting begins.

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Related Terms

• Process Letter — the formal bid instructions document that solicits LOI submissions
• Confidential Information Memorandum (CIM) — the marketing document buyers review before submitting an LOI
• Data Room — the secure due diligence repository opened after exclusivity is granted
• Management Presentation — the live buyer meeting that typically precedes final LOI submissions
• Deal Memo — the internal advisor document that frames the transaction before formal marketing begins

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