letter of intent loi

What is a Letter of Intent (LOI)?

A letter of intent (LOI) is a document that outlines the key terms of a proposed transaction before the parties enter into a final, legally binding agreement. In mergers and acquisitions, it signals that both sides are serious about progressing the deal and have aligned on the main commercial points.

An LOI does not usually complete the transaction. Instead, it provides a structured starting point for due diligence and detailed negotiations.

What does a letter of intent include?

An LOI sets out the headline terms of the proposed deal so both parties understand the direction of travel. The document helps reduce uncertainty and keeps the process focused.

Typical contents include:

  • The structure of the transaction and what is being acquired
  • An indicative price or valuation range
  • Key assumptions and commercial terms
  • A proposed timeline and milestones
  • Conditions that must be met before signing a final agreement

These elements act as a roadmap for the next stage of the deal.

Binding vs non-binding elements

Most of an LOI is non-binding, but some clauses are intended to be legally enforceable. Understanding this distinction is essential.

Element

Typical status

Purpose

Commercial terms (price, structure)

Non-binding

Guide negotiations and set expectations

Confidentiality

Binding

Protect sensitive information shared during the process

Exclusivity

Binding (if included)

Prevent the seller from negotiating with other parties

Governing law

Binding

Define how disputes will be handled

How an LOI fits into the M&A process

The LOI sits between early discussions and final agreements. It usually follows a confidentiality agreement and comes before detailed due diligence.

After signing an LOI, the parties typically:

  • Carry out due diligence to validate assumptions
  • Refine valuation and deal structure
  • Negotiate and draft definitive agreements

This makes the LOI a key step in moving from interest to execution.

Benefits of using an LOI

An LOI helps create momentum and clarity in a transaction. It gives both sides a shared understanding of the deal before committing significant resources.

It also helps advisors, legal teams and stakeholders work from a consistent framework, which can speed up negotiations and reduce misunderstandings.

Risks and challenges

Despite its benefits, an LOI can create issues if it is not carefully prepared:

  • Ambiguous wording can lead to disputes later
  • Parties may treat non-binding terms as fixed
  • Binding clauses may create obligations that were not fully considered

Legal review is important to ensure the document reflects the intended level of commitment.