Transaction Academy · Module 03
Letter of Intent (LOI).
The Letter of Intent is often the first substantive document negotiated in a business acquisition. Learn how it establishes the principal business terms, aligns expectations, and shapes the definitive purchase agreement.
Overview
The Letter of Intent ("LOI") is often the first substantive document negotiated in a business acquisition. Although it is generally preliminary in nature, the LOI establishes the principal business terms of the proposed transaction and serves as the framework for the negotiation of the definitive purchase agreement.
A carefully drafted LOI helps align expectations, identify key issues early, and reduce the likelihood of significant disputes later in the transaction.
This module explains the purpose of the LOI, its typical provisions, common negotiation points, and the considerations buyers and sellers should evaluate before signing.
Lesson 1
What Is a Letter of Intent?
A Letter of Intent is a written document that outlines the parties' preliminary understanding of the proposed transaction.
While the final purchase agreement contains the legally binding terms governing the acquisition, the LOI allows the parties to agree on the major business terms before investing substantial time and expense in due diligence and definitive documentation.
A well-drafted LOI often addresses:
- Proposed purchase price
- Transaction structure
- Due diligence
- Exclusivity
- Financing
- Closing timeline
- Confidentiality
- Key assumptions
- Significant contingencies
Although relatively short, the LOI frequently shapes the direction of the entire transaction.
Lesson 2
Is an LOI Legally Binding?
One of the most common misconceptions is that an LOI is either entirely binding or entirely non-binding.
In reality, many Letters of Intent contain both binding and non-binding provisions.
Generally, the parties do not intend to be legally obligated to complete the transaction until a definitive purchase agreement is executed.
However, certain provisions are commonly intended to be enforceable, including:
- Confidentiality
- Exclusivity (No-Shop)
- Governing Law
- Allocation of Certain Expenses
- Access to Information
- Public Announcements
Whether a particular provision is binding depends on the language of the LOI and applicable law. Accordingly, parties should carefully review an LOI before signing, even if it is described as "non-binding."
Lesson 3
Purchase Price
The purchase price is often the most heavily negotiated business term.
However, the headline purchase price alone rarely tells the entire story.
The LOI should clarify:
- Total purchase price
- Cash paid at closing
- Seller financing
- Earnout consideration
- Equity rollover
- Escrow or holdback amounts
- Working capital adjustments
- Assumed liabilities
Two transactions with the same stated purchase price may have significantly different economic outcomes depending on how the consideration is structured.
Lesson 4
Transaction Structure
The LOI should identify the proposed legal structure of the transaction.
Common structures include:
- Asset Purchase
- Stock Purchase
- Membership Interest Purchase
- Merger
The chosen structure affects legal liability, tax treatment, contract assignments, employee transitions, regulatory approvals, and post-closing obligations. For this reason, transaction structure should be evaluated early in the negotiation process.
Lesson 5
Exclusivity (No-Shop)
Many buyers require the seller to grant an exclusivity period after execution of the LOI.
During this period, the seller generally agrees not to:
- Solicit competing offers
- Negotiate with other potential buyers
- Share confidential information with competing bidders
- Enter into another acquisition agreement
Exclusivity provides the buyer with confidence that its investment in due diligence and negotiations will not be undermined by competing offers.
From the seller's perspective, the exclusivity period should generally be reasonable in duration and tied to the buyer's continued progress toward closing.
Lesson 6
Due Diligence
Most LOIs provide the buyer with an opportunity to investigate the business before becoming obligated to complete the acquisition.
Due diligence commonly includes review of:
- Financial records
- Corporate records
- Material contracts
- Employment matters
- Intellectual property
- Litigation
- Tax matters
- Regulatory compliance
- Real estate
- Insurance
The LOI often establishes the expected due diligence period and the parties' obligations regarding access to information.
Lesson 7
Financing
If the buyer intends to obtain financing, the LOI may address how financing affects the proposed transaction.
Topics may include:
- Third-party financing
- SBA financing
- Conventional commercial loans
- Seller financing
- Financing contingencies
- Timing of financing approval
Sellers frequently seek certainty of closing, while buyers may desire flexibility if financing cannot be obtained. Balancing these competing interests is often an important part of the negotiation process.
Lesson 8
Closing Conditions
An LOI frequently identifies the principal conditions that must be satisfied before the transaction may close.
Examples include:
- Satisfactory due diligence
- Execution of definitive agreements
- Financing approval
- Required third-party consents
- Regulatory approvals
- Landlord consents
- Board or shareholder approvals
- Absence of material adverse changes
Identifying these conditions early helps both parties understand what remains to be accomplished before closing.
Lesson 9
Common Negotiation Points
While every transaction is unique, certain provisions are negotiated in almost every LOI.
These commonly include:
- Purchase price
- Transaction structure
- Earnouts
- Seller financing
- Working capital adjustments
- Exclusivity period
- Due diligence timeline
- Closing timeline
- Allocation of transaction expenses
- Required consents
- Confidentiality obligations
Resolving these issues at the LOI stage often reduces uncertainty during the negotiation of the definitive purchase agreement.
Lesson 10
When Should You Hire an Attorney?
Some buyers and sellers wait until the purchase agreement is being drafted before retaining legal counsel.
In many transactions, however, the LOI establishes the business framework that will govern later negotiations.
Legal counsel can assist with:
- Identifying legal risks
- Clarifying ambiguous provisions
- Negotiating transaction structure
- Evaluating exclusivity provisions
- Reviewing financing terms
- Identifying issues that may affect closing
- Coordinating with accountants, lenders, and other advisors
Addressing these issues early may reduce the likelihood of costly revisions later in the transaction.
Key Takeaways
What to remember from this module.
- The Letter of Intent establishes the framework for the transaction.
- Although many provisions are non-binding, certain obligations—such as confidentiality and exclusivity—may be legally enforceable.
- The purchase price is only one component of the overall economic deal.
- The proposed transaction structure can significantly affect legal, tax, and operational considerations.
- Careful review and negotiation of the LOI can help identify issues early and provide a stronger foundation for the definitive purchase agreement.
What's Next
Module 4 — Due Diligence
Learn how buyers evaluate a business before closing, what information is commonly requested, the purpose of a virtual data room, and how proactive preparation can help streamline the due diligence process and reduce transaction risk.
Educational Disclaimer
The information contained in this module is provided solely for educational and informational purposes. It is intended to provide a general overview of letters of intent in mergers and acquisitions and does not constitute legal, tax, accounting, investment, or financial advice. Reading this material or using the Transaction Academy does not create an attorney-client relationship with GV LAW PLLC. Every transaction is unique, and buyers and sellers should consult qualified professional advisors regarding their specific circumstances.