Letter of Intent (LOI)
A preliminary document outlining the key terms of a proposed M&A transaction — price, structure, financing, timeline, and conditions — mostly non-binding but typically including binding provisions for exclusivity and confidentiality.
Full Definition
The LOI (sometimes called a "term sheet" in smaller deals, though the two terms can have technical distinctions) is the first major milestone in a negotiated M&A transaction. It signals that parties have aligned on the main economic terms and are prepared to invest in diligence and definitive agreement drafting. LOIs are typically 3-10 pages in SMB/LMM deals.
How it actually works: A typical LOI includes: (1) purchase price and structure — enterprise value, cash/note/earnout/rollover breakdown; (2) deal structure — asset sale, stock sale, F reorg, etc.; (3) financing sources — equity and debt sources; (4) working capital target — peg or reference; (5) cash-free, debt-free basis with definitions of debt-like items; (6) seller note or earnout terms if applicable; (7) escrow and indemnification outline; (8) non-compete scope; (9) diligence timeline and key approvals needed; (10) exclusivity period (typically 30-90 days); (11) conditions to closing — material ones like financing, HSR, key consents; (12) termination rights; (13) confidentiality provisions; (14) expense allocation (who pays for what).
Critical legal point: most LOIs are mostly non-binding, with specifically identified binding provisions (usually exclusivity, confidentiality, expense allocation, and sometimes break fees). The language matters enormously — an improperly drafted LOI can bind parties to terms they didn't intend to commit to. Delaware and New York courts have found LOIs to be binding under specific circumstances even when parties intended them to be non-binding.
Seller vs. Buyer Perspective
The LOI is where most economic terms get set. Once signed and exclusivity begins, the price and major structure are very hard to change favorably. Before signing: (1) negotiate hard on price range (not just headline number — also the deductions and WC mechanics); (2) lock in key structural items (non-compete scope, escrow levels, survival periods); (3) define "debt-like items" specifically to prevent ambush at definitive; (4) keep exclusivity short (30-45 days ideally); (5) make exclusivity conditional on buyer progress; (6) minimize binding provisions beyond exclusivity and confidentiality. Get experienced M&A counsel to review before signing — boilerplate LOIs often have language that benefits buyers at sellers' expense.
LOIs are your vehicle for locking in favorable terms before diligence changes the dynamic. Key structural wins to try to get in the LOI: (1) aggressive working capital definitions; (2) clear debt-like items inclusive of items the seller might resist later; (3) tight indemnification framework; (4) sufficient exclusivity to complete diligence; (5) defined conditions for close. Don't get greedy — an LOI that tries to pre-negotiate every definitive term gets rejected. Focus on the 5-7 most important economic points. Remember the LOI is mostly non-binding; real negotiation happens in the purchase agreement.
Real-World Example
A $5.5M EBITDA professional services firm receives an LOI from a PE-backed platform. Key terms: (1) enterprise value $32M (5.8x TTM); (2) structure — F reorganization, 100% equity acquisition; (3) payment — $26M cash, $3M rollover equity (10%), $3M earnout over 24 months tied to EBITDA; (4) working capital peg $2.1M; (5) escrow 10% for 18 months; (6) non-compete 4 years, 150 miles; (7) debt-like items defined specifically (bank debt, capital leases, accrued bonuses > $100K, deferred rent); (8) exclusivity 60 days with 30-day extension option; (9) binding provisions limited to exclusivity, confidentiality, and expense allocation ($100K seller commitment to defined expenses if seller terminates without cause). Signed LOI. Over 60 days: diligence produces $350K working capital adjustment, QoE accepts 92% of add-backs, minor indemnity structure changes but major economics hold. Deal closes at $31.65M ($32M minus $350K WC adjustment). LOI provided 90%+ clarity on economic outcome.
Why It Matters & Common Pitfalls
- !"Non-binding" isn't universal. Some provisions (exclusivity, confidentiality, expense allocation, break fees) are typically binding. Others may be binding depending on drafting. Review carefully.
- !Re-trading at LOI stage is limited. Once signed, economic terms are sticky. Major re-trade attempts during diligence damage relationships and can kill deals.
- !Definitions matter. "Cash-free, debt-free" needs specific definitions of debt-like items. "Working capital" needs methodology. Ambiguity creates disputes later.
- !Exclusivity length drives dynamics. Too short and diligence can't complete; too long and seller loses leverage. 45-60 days is sweet spot for most SMB deals.
- !Conditions should be specific. "Satisfactory completion of diligence" gives the buyer unlimited walk rights. Tie conditions to specific issues (financing, HSR, key consents).
- !Expense allocation. Who pays for what if the deal fails? Usually each party bears their own costs, but binding break fee provisions can change this.
- !Multiple LOIs. A seller might receive several LOIs simultaneously. Negotiate all of them before signing one; granting exclusivity to the wrong bidder is costly.
- !State-law variations. LOI enforceability varies by state. Delaware and New York have specific case law; other states less developed.
Frequently Asked Questions
What is a Letter of Intent in M&A?↓
Is a Letter of Intent legally binding?↓
What should be included in an LOI?↓
What's the difference between an LOI and a term sheet?↓
Related Terms
Indication of Interest (IOI)
A non-binding preliminary offer from a prospective buyer after reviewing the CIM — expressing interest, preliminary valuation range, and proposed deal structure to earn a place in the next round of the sale process.
Term Sheet
A bullet-point summary of key terms in a proposed M&A transaction — often simpler than a Letter of Intent, used for preliminary alignment before formal LOI drafting.
Exclusivity Period
A contractual period, typically 30–90 days after LOI signing, during which the seller agrees not to solicit or negotiate with other potential buyers — the point in a deal where leverage shifts from seller to buyer.
Definitive Agreement
The final, binding purchase contract governing an M&A transaction — containing all terms, representations, warranties, indemnification provisions, closing conditions, and covenants agreed between the parties. Typically signed 30-90 days after LOI.
Working Capital Peg
The agreed target level of working capital the seller is expected to deliver at closing — the benchmark against which actual closing working capital is measured for purchase price adjustment.
Get Weekly M&A Insights
Valuation data, deal analysis, and plain-English M&A education — every week.
The LegacyVector Newsletter
Join 5,000+ business owners, investors, and buyers who get weekly M&A market data and deal insights.
- Weekly valuation multiples by industry
- SBA lending rates & deal financing data
- Market trends & acquisition opportunities
No spam. Unsubscribe anytime. Free forever.
Disclaimer: The information provided on this page is for educational and informational purposes only. It should not be considered financial, legal, or investment advice. Business valuations depend on many factors specific to each situation. Always consult with qualified professionals — including business brokers, CPAs, and M&A attorneys — before making acquisition or sale decisions. LegacyVector is not a licensed broker, financial advisor, or attorney. Data shown may be based on limited samples and may not reflect current market conditions.
LegacyVector Research Team
Reviewed by M&A professionals · Updated April 2026