A Letter of Intent (LOI) is a non-binding document that outlines the key terms of a proposed M&A transaction. While mostly non-binding, the LOI sets the framework for the definitive agreement and is the most important negotiating document in the deal process.
What Is an LOI?
A Letter of Intent outlines the key terms of a proposed transaction before the parties invest in full legal documentation and due diligence. It signals mutual intent to proceed and establishes the framework for negotiation.
LOI Structure
- Transaction Structure: Asset purchase vs. Stock purchase vs. Merger
- Purchase Price: Total consideration, form (cash/stock/earnout), earnout structure
- Representations and Warranties: Scope, survival period, indemnification caps and baskets
- Conditions to Closing: Due diligence, regulatory approvals, third-party consents, financing condition
- Exclusivity: Prevents seller from soliciting other offers (typically 30–90 days)
6. Confidentiality: Typically binding
7. Break-Up Fee: Paid if deal falls through due to one party's actions
Binding vs. Non-Binding Provisions
Binding: Confidentiality, Exclusivity, Governing law, Break-up fee
Non-binding: Everything else (price, structure, reps & warranties)
What to Negotiate in the LOI
1. Valuation and consideration mix
2. Exclusivity period (shorter is better for sellers. 30–45 days is reasonable)
3. Indemnification caps (10–20% of purchase price)
4. Basket/deductible — minimum threshold before indemnification kicks in
5. Escrow amount and duration
6. Key employee retention terms
Key Takeaways
- The LOI sets the framework for the definitive agreement — negotiate it carefully.
- Exclusivity and confidentiality are typically the only binding LOI provisions.
- Negotiate indemnification caps (10–20% of purchase price) and baskets in the LOI.
- Shorter exclusivity periods are better for sellers — 30–45 days is reasonable.
- Never sign an LOI without understanding the earnout structure and escrow terms.