Introduction
A letter of intent (LOI) is a written document that sets out the preliminary terms and mutual understanding between two (or more) parties who intend to complete a business transaction. LOIs are commonly used in mergers & acquisitions (M&A), asset purchases, joint ventures, large commercial agreements, real estate deals, grant applications, athletic commitments, and other situations where the parties want to record the broad strokes before negotiating detailed, binding contracts.
Key takeaways
– An LOI declares a preliminary commitment and summarizes the main terms of a proposed deal.
– LOIs are typically non‑binding, but they commonly include a few binding provisions (e.g., confidentiality, exclusivity/no‑shop, and expense allocation).
– LOIs reduce misunderstandings by aligning expectations early, enabling due diligence, and establishing timelines and milestones.
– Alternatives include term sheets and memoranda of understanding (MOUs); the practical difference is largely format and the parties’ intent about legal enforceability.
Sources: Investopedia (Madelyn Goodnight) and Cornell Law School Legal Information Institute.
Why use an LOI?
– Clarify the principal commercial terms (price, structure, payment terms, timeline).
– Signal seriousness and good faith to counterparties and third parties (e.g., lenders).
– Give a framework to organize due diligence and drafting of definitive agreements.
– Reserve negotiating rights while protecting specific interests (confidentiality, exclusivity).
– Speed negotiations by reducing surprises in the final contract stage.
Common situations where LOIs are used
– Mergers & acquisitions or asset purchases.
– Joint ventures or strategic alliances.
– Real estate transactions and leases.
– Funding rounds or grant applications.
– Athletic recruitment or other personal commitments.
– Family planning documents (non‑legal statements of parental expectations, sometimes referenced by courts).
Core components of an LOI
A practical LOI typically includes the following sections
1. Heading and parties
– Name the parties, addresses, and date.
2. Transaction description
– Brief description of the transaction (purchase of company X, formation of JV, license, etc.).
3. Consideration and price
– Purchase price or funding amount, currency, and allocation (cash vs. stock).
4. Payment terms and financing
– How and when payment will be made, contingencies for financing.
5. Structure of the deal
– Asset sale vs. stock sale, equity percentages, or licensing structure.
6. Key conditions and contingencies
– Due diligence, regulatory approvals, third‑party consents, financing, board approvals.
7. Timeline and milestones
– Target dates for signing definitive agreements and closing.
8. Exclusivity / no‑shop (if any)
– Whether seller will not solicit or negotiate with other parties for a specified period.
9. Confidentiality / NDA
– Statement that negotiations and information exchanged are confidential (often binding).
10. Binding vs. non‑binding language
– Clear statement of which provisions are intended to bind the parties and which are not.
11. Termination and expiration
– When and how the LOI will expire or can be terminated.
12. Allocation of costs and expenses
– Whether each party pays its own legal and transaction costs, or other arrangements (often binding).
13. Governing law and jurisdiction
– Choice of law and dispute resolution for enforceable provisions.
14. Signatures
– Authorized signatories and dates.
LOI vs. Term Sheet vs. MOU
– LOI: Letter format, often used in M&A and commercial deals; usually non‑binding except for specific clauses.
– Term sheet: More structured, list format; often used in venture capital and financing rounds; similar enforceability issues.
– Memorandum of Understanding (MOU): Can be similar to an LOI but sometimes intended to be more formal or binding depending on language and jurisdiction. Always confirm intent to be bound within the document.
The LOI to purchase (Letter of Intent to Purchase)
When a buyer writes an LOI to purchase a business, it should specify:
– Proposed purchase price and allocation (assets vs. liabilities).
– Payment structure (cash at close, seller notes, earnouts, stock).
– Due diligence scope and timing.
– Conditions to close (approvals, financing, absence of material adverse change).
– Proposed timeline and exclusivity (if requested).
– Which provisions are binding (e.g., confidentiality, exclusivity, expenses).
Alternatives to an LOI
– Proceed directly to a definitive agreement (possible for small or simple deals).
– Use a term sheet (preferred in many financing and VC contexts).
– Draft an MOU (if the parties want a more formal, sometimes binding, preliminary contract).
– Rely solely on negotiated emails and internal approvals (risky—usually not recommended).
Three primary purposes of writing a Letter of Intent
1. Clarify material economic and structural terms so that both parties understand the proposed deal.
2. Protect immediate interests while negotiating (confidentiality, short exclusivity, cost allocation).
3. Create a practical roadmap—timelines, due diligence, and milestones—to move the transaction toward definitive agreements.
Practical steps to draft, negotiate, and use an LOI
For buyers and sellers, follow these step‑by‑step practical measures
A. Before drafting the LOI
1. Define deal objectives and “must‑haves” vs. “tradeoffs.”
2. Complete preliminary internal approvals and obtain authority to sign an LOI.
3. Prepare a due diligence plan (what documents you’ll need, who will review them, and timeframe).
B. Drafting the LOI (practical checklist)
1. Use clear headings and plain language.
2. State whether the LOI is intended to be binding or non‑binding and which clauses are binding. Typical binding clauses: confidentiality, exclusivity, and expense allocation.
3. Include concrete dates and milestones. Vague timelines invite disputes.
4. Include material economic terms (price, consideration structure).
5. Identify key conditions precedent (financing, regulatory approvals, material adverse change).
6. Attach or reference preliminary schedules if helpful (e.g., list of excluded assets).
7. Include a clear termination date for the LOI.
C. Negotiation tips
1. Insist on clarity about binding elements—ambiguous wording causes litigation risk.
2. If you need exclusivity, be prepared to limit the term and offer reasonable consideration or milestones to justify it.
3. Use a confidentiality clause to protect sensitive info during diligence.
4. Avoid overly broad “non‑binding” language that still functions as a commitment in practice.
5. Consider including a breakup fee only where appropriate and enforceable.
D. Due diligence and follow‑through
1. Once LOI executed, exchange documents and begin diligence promptly.
2. Track issues uncovered in diligence and map them to LOI conditions.
3. Update transaction economics if diligence reveals material differences; use amendment to LOI or move to definitive agreement.
4. Move quickly to finalize definitive agreements while LOI terms and exclusivity (if any) remain current.
E. Closing and post‑LOI
1. Resolve all conditions precedent, obtain approvals and financing.
2. Execute definitive agreements (purchase agreement, employment agreements, IP assignments).
3. Observe any post‑closing adjustments (working capital, earnouts).
4. Confirm termination of exclusivity and any surviving obligations (e.g., confidentiality).
Practical sample language (short examples)
– Non‑binding statement: “This Letter of Intent summarizes the principal terms of the proposed transaction. Except for Sections 6 (Confidentiality) and 7 (Exclusivity), which are intended to be legally binding, this LOI is non‑binding and is intended only as a basis for negotiating definitive agreements.”
– Confidentiality clause (binding): “Each party agrees to keep confidential all non‑public information received and to use such information solely for evaluating the proposed transaction.”
– Exclusivity clause (binding, example): “For a period of 60 days from the Effective Date, Seller shall not solicit, negotiate, or enter into any agreement regarding the sale of the Business with any third party.”
Due diligence checklist tied to an LOI
– Corporate documents: articles, bylaws, ownership records, board minutes.
– Financials: audited statements, management accounts, tax returns, forecasts.
– Contracts: customer, supplier, lease, employment, IP licenses.
– Litigation and regulatory: pending lawsuits, compliance matters.
– Intellectual property: registrations, assignments, pending applications.
– Employees and benefits: agreements, equity plans, key employee retention.
– Environmental and property: permits, inspections (for real estate/industrial deals).
Common pitfalls and how to avoid them
– Ambiguous binding language: Explicitly list which sections are binding.
– Too much detail, too early: Keep LOI focused on material terms; avoid drafting a full definitive agreement.
– Overly long exclusivity without consideration: Limit exclusivity to a reasonable period and tie to milestones.
– Skipping due diligence: Use LOI to schedule and enable proper diligence—don’t rely solely on LOI assurances.
– Underestimating costs: Specify cost allocation in the LOI (who pays for advisors).
When an LOI can be enforceable
Although LOIs are often intended to be non‑binding, courts may enforce parts of an LOI if:
– The parties clearly intended to be bound on specific provisions, or
– The language is sufficiently definite and courts can infer intent to be bound, or
– Promissory estoppel arises where one party reasonably relied to its detriment on the LOI.
Bottom line
An LOI is a pragmatic tool for capturing the essential terms of a proposed transaction and creating the practical framework for due diligence and drafting definitive agreements. Use it to align expectations, protect immediate interests (confidentiality, exclusivity, costs), and accelerate a clean negotiation to closing—while being explicit about which parts are legally binding.
Sources and further reading
– Investopedia. “Letter of Intent (LOI).” Madelyn Goodnight. (source provided by user)
– Cornell Law School Legal Information Institute. “45 CFR § 1160.9 – Letter of Intent.”
– Draft a one‑page LOI template tailored to a specific transaction (M&A, real estate, JV, or purchase).
– Provide clause wording for jurisdiction‑specific enforceability (e.g., U.S. states or common law vs civil law jurisdictions).