A Letter of Intent, or LOI, is exactly what the name implies: an expression of intent between a buyer and a seller to negotiate the sale of a business. It lays out the general framework for a transaction and serves as a bridge between the initial handshake and the final closing. A well-drafted LOI sets expectations, guides negotiations, and promotes a smoother and more efficient deal process.
Together with a binding Non-Disclosure Agreement, the LOI establishes trust between parties and ensures that discussions move forward with clear expectations around timing, structure, and terms. It helps minimize misunderstandings, reduces the likelihood of surprises during due diligence, and keeps the deal on track. In short, a strong LOI lays the foundation for a productive negotiation and successful closing.
While LOIs are typically described as nonbinding, that description is only partly accurate. The LOI is nonbinding regarding the final transaction itself, but many of its process related provisions such as confidentiality, exclusivity, and timelines are binding. The LOI is not an agreement to sell, but rather an agreement to negotiate a potential sale in good faith.
Several provisions in an LOI are customarily binding and serve to protect both parties during the negotiation period.
Sellers agree to negotiate solely with the named buyer during the LOI period and suspend any outreach to other potential acquirers. This assures the buyer that their time and effort are not being used to shop the deal.
Buyers are generally prohibited from recruiting the seller’s employees or interfering with ongoing business operations. These provisions preserve business continuity during due diligence and protect the seller’s value.
NDAs are often signed before or in connection with an LOI and govern the exchange and protection of proprietary information throughout the deal process and beyond.
The LOI may set expectations for cooperation, responsiveness, and good faith during due diligence. These often extend to the parties’ advisors, including attorneys and accountants.
LOIs are time limited. This creates urgency, discourages delays, and helps manage professional fees and transaction costs.
Although not binding, the LOI outlines essential deal terms and helps align expectations.
It is common for the LOI to anticipate working capital adjustments or earnouts. Setting a general framework early helps prevent misunderstandings later.
The LOI clarifies whether the transaction is a stock or asset sale. If equity is involved, it outlines whether the seller will retain an interest. In an asset sale, it specifies which assets and liabilities will transfer.
The LOI may include contingencies related to the buyer securing financing and explain how the purchase price will be paid, whether through cash, seller financing, or earnouts.
If buyer continuity depends on retaining certain team members, that condition can be addressed in the LOI. Sellers can also specify retention terms for key staff.
Some complex issues are deliberately left open in the LOI for future negotiation. These may include seller transition roles, licensing arrangements, or unresolved contingencies discovered in due diligence.
The content and complexity of a Letter of Intent vary from deal to deal. However, its purpose is consistent: to guide the negotiation process in a clear, focused, and fair manner. Working with experienced sell side advisors like Optima Mergers & Acquisitions can ensure your LOI protects your interests, aligns with market norms, and sets your deal up for success.
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