A Letter of Intent Is Not "Just a Letter"

One of the most common misconceptions in mergers and acquisitions is that the Letter of Intent ("LOI") is little more than an agreement to keep talking.

It is true that many provisions in an LOI are non-binding. That does not mean the document is unimportant.

In practice, the Letter of Intent often establishes the commercial framework for the remainder of the transaction. Once the parties agree on that framework, significant departures become increasingly difficult as the deal progresses.

For that reason, an LOI deserves the same level of strategic attention as the definitive purchase agreement.

The Transaction Begins Long Before the Purchase Agreement

By the time the purchase agreement is circulated, the parties have often spent weeks negotiating the fundamental economics of the transaction.

• Purchase price.
• Deal structure.
• Exclusivity.
• Financing.
• Closing timeline.
• Working capital expectations.

These issues are frequently addressed in the Letter of Intent. While the definitive agreement expands upon them, it rarely rewrites the business deal entirely.

An unfavorable provision accepted at the LOI stage often becomes the starting point for every subsequent negotiation.

Exclusivity Has Real Value

One provision that deserves particular attention is exclusivity.

During an exclusivity period, a seller typically agrees not to solicit or negotiate with other prospective buyers for a specified period of time. In exchange, the buyer commits time, resources, and expense to conducting due diligence and preparing transaction documents.

When appropriately drafted, exclusivity benefits both parties.

For sellers, it demonstrates a serious commitment from the buyer.

For buyers, it provides confidence that they can invest in the transaction without competing against other bidders.

The duration and scope of exclusivity, however, should be carefully considered. Once granted, a seller's negotiating leverage often becomes more limited.

Price Is Only One Component of the Deal

Business owners naturally focus on purchase price.

Sophisticated buyers understand that price is only one component of the transaction.

An LOI may also establish expectations regarding:

• Seller financing.
• Earnout provisions.
• Escrow arrangements.
• Employment or consulting relationships.
• Allocation of transaction expenses.
• Due diligence periods.
• Conditions to closing.

Each of these terms has the potential to materially affect the economics of the transaction.

A higher purchase price may ultimately provide less value if it is accompanied by extensive contingencies, significant deferred payments, or broad post-closing obligations.

Small Provisions Can Have Significant Consequences

Not every issue in an LOI receives equal attention.

• A vague due diligence provision may create uncertainty regarding the buyer's ability to terminate the transaction.
• An unrealistic closing timeline can create unnecessary pressure.
• An overly broad confidentiality or standstill provision may unintentionally restrict future opportunities.

These issues are rarely headline terms, yet they often shape the course of the transaction.

Final Thoughts

The Letter of Intent is more than a preliminary document.

It establishes expectations, allocates leverage, and frequently sets the trajectory for the negotiations that follow.

Business owners should resist the temptation to treat the LOI as a formality. Careful attention at the outset often reduces the need for difficult negotiations later and places the parties in a stronger position as the transaction moves toward closing.