Letter of Intent
Preliminary document expressing a party's intent to enter a transaction, outlining key proposed terms.
A Letter of Intent (LOI) is a preliminary written document that expresses one party's serious interest in pursuing a business transaction and outlines the proposed key terms. LOIs are functionally equivalent to term sheets but are more commonly used in mergers and acquisitions, commercial real estate, and strategic partnerships, while 'term sheet' is more prevalent in venture capital and private equity financing.
In M&A transactions, an LOI typically includes proposed purchase price and payment structure, deal structure (asset vs. stock purchase), earnout provisions, working capital mechanism, treatment of existing debt and liabilities, employee retention provisions, exclusivity period for due diligence, anticipated closing timeline, and conditions to closing. The LOI gives both parties confidence that fundamental economics are aligned before investing significant time and money in due diligence and definitive documentation.
Like term sheets, most LOI provisions are non-binding. The binding provisions typically include confidentiality/NDA, exclusivity (preventing the seller from engaging with other potential buyers), and sometimes break-up fees if the deal fails due to buyer breach.
In real estate, LOIs outline purchase price, financing contingency, inspection period, earnest money deposit, and closing date. Commercial tenants use LOIs to propose lease terms before formal lease drafting.
Signing an LOI does not guarantee a transaction will close—due diligence findings, financing changes, or market deterioration frequently cause LOI signings to not progress to definitive agreements. The percentage of signed LOIs that close varies widely by industry and deal size.
FAQs
Should a seller negotiate an LOI before granting exclusivity?
Yes—sellers should negotiate LOI terms as thoroughly as possible before granting exclusivity, because exclusivity gives the buyer significant negotiating leverage. Once the seller is bound by exclusivity and cannot solicit competing offers, the buyer can drag out due diligence, identify issues to justify price reductions, and pressure the seller into accepting less favorable definitive terms. Sellers should ensure the LOI reflects their best achievable economics and includes a short exclusivity period (30–45 days) with clear milestones before signing.
What is the difference between a letter of intent and a memorandum of understanding?
A Letter of Intent (LOI) and Memorandum of Understanding (MOU) are functionally similar—both express intent and outline proposed terms without typically creating binding obligations. In practice, MOUs are more commonly used in government, nonprofit, and international business contexts, while LOIs are more common in M&A and commercial transactions. An MOU often describes cooperation frameworks or joint venture intentions; an LOI typically describes a specific proposed transaction with more specific deal economics. The binding force of either document depends entirely on the language used, not the title.
Can LOI terms be used against a party if the deal falls through?
Generally no—non-binding LOI provisions are not enforceable if the transaction does not close. However, courts in some jurisdictions have found that repeated oral or written representations during LOI-stage negotiations created implied duties to negotiate in good faith, particularly if one party incurred substantial expenses in reliance on those representations. Sophisticated parties include explicit language stating that neither party is obligated to complete the transaction and that no course of dealing creates binding obligations until definitive agreements are fully executed.
Related Terms
Term Sheet
Non-binding document outlining the key terms of a proposed investment or acquisition deal.
Due Diligence
Systematic investigation of a business or investment to verify facts and identify material risks before closing.
Representations and Warranties
Contractual statements of fact in a purchase agreement that allocate risk between buyer and seller.
Earnout
Contingent payment mechanism tying part of the acquisition price to the target's future financial performance.
