Letter of Intent (LOI)
A Letter of Intent (LOI) is a short document signed by a buyer and seller that sets out the proposed price, deal structure, and timeline for an acquisition before either side spends money on due diligence and definitive agreements. Most of an LOI is expressly non-binding, but a handful of provisions — exclusivity, confidentiality, expense allocation, and governing law — take effect the moment it is signed.
Also called term sheet, heads of terms, letter of intent to purchase, memorandum of understanding · Last updated 2026-08-07 · All 24 terms
What an LOI should specify
A two-page LOI that says only 'purchase price of $6,000,000, subject to diligence' guarantees a fight in six weeks. The document exists to surface structural disagreements while both sides can still walk away cheaply.
At minimum, a lower-middle-market LOI names the following.
- Price and how it is derived — a fixed dollar enterprise value, or an explicit multiple applied to a named earnings figure (SDE or adjusted EBITDA) for a named period.
- The consideration mix: cash at close, seller note principal and rate, earn-out, rollover equity, and any escrow or holdback with its release date.
- Asset sale or stock sale, and which entity is buying — this drives the seller's after-tax proceeds more than a quarter turn of multiple does.
- Cash-free, debt-free treatment and how net working capital will be pegged, even where the peg itself is set later by the quality of earnings analysis.
- Exclusivity: the no-shop period and its expiry date.
- Diligence scope and deadline, and the seller's obligation to provide access.
- The seller's post-close role: employment or consulting term, and the non-compete radius and duration.
- Conditions to closing — financing, landlord consent to lease assignment, key customer consents, licensing.
- Who pays what if the deal dies, and an expiration date on the offer itself.
Binding versus non-binding is the part that gets litigated
The standard LOI states that no obligation to complete the transaction arises until a definitive purchase agreement is executed, then carves out a short list of provisions that bind immediately. Exclusivity is the one with real economic weight: for the duration of the no-shop, the seller cannot market the business, take another call, or negotiate with a second buyer. That is the consideration the buyer receives for funding diligence.
The trap is assuming the non-binding label is self-executing. In SIGA Technologies v. PharmAthene, a term sheet the parties had marked non-binding sat alongside a separate, express contractual obligation to negotiate a definitive agreement in good faith. The Delaware Supreme Court held in 2013 that the express obligation was enforceable and that the party who walked away had breached it; a later appeal in 2015 affirmed a substantial expectation-damages award. The lesson is not that LOIs are secretly binding — it is that a clause promising to negotiate in good faith, not to solicit, or to reimburse costs means what it says regardless of the header at the top of the page.
Which sentences in a particular LOI create enforceable duties is a drafting question for deal counsel on both sides, and it is answered by reading the operative verbs, not the label.
A representative structure
A services business is under LOI at a $6,000,000 enterprise value on a cash-free, debt-free basis — 4.0x trailing adjusted EBITDA of $1,500,000.
Consideration: $4,800,000 cash at closing, a $600,000 seller note at 7% over five years (twelve months interest-only, then four years of amortization), and a $600,000 earn-out payable across two years against a gross profit target. Of the cash at closing, $300,000 is escrowed for twelve months against indemnity claims. 4,800,000 + 600,000 + 600,000 = $6,000,000.
The seller leaves the closing table with $4,500,000, because the escrow is funded out of the cash component. Twenty percent of the headline price ($1,200,000) is contingent on performance or on the buyer's credit, and another five percent ($300,000) is at risk to indemnity claims. A seller who reads only the $6,000,000 has misread the offer by $1,500,000 — which is why the consideration mix, not the enterprise value, is the term worth negotiating hardest in an LOI.
LOI, IOI, term sheet, and purchase agreement
An indication of interest (IOI) comes first and is deliberately vague — a price range rather than a number, no exclusivity, no structure. Buyers submit IOIs after reading the confidential information memorandum, and the seller uses them to decide who gets a management meeting.
A term sheet and an LOI are functionally the same instrument; term sheet is the more common label in institutional and financing contexts, LOI in operating-company M&A. 'Heads of terms' is the UK equivalent. 'Memorandum of understanding' is sometimes used interchangeably, though the phrase also covers agreements that have nothing to do with a sale and carries no settled meaning in US M&A — which is a reason to avoid it on a deal document. None of these is a contract to buy.
The definitive purchase agreement — an asset purchase agreement or a stock purchase agreement — is the binding document. It carries the representations and warranties, the indemnification cap and basket, the working capital true-up mechanics, and the closing conditions, none of which the LOI resolves. Expect the definitive agreement to run 40 to 80 pages against the LOI's three to six.
Anything left ambiguous in the LOI gets resolved in the purchase agreement, at a point when the seller has been off the market for two months and has far less leverage than at signature.
Leverage peaks at signature
Before the LOI is signed, a seller running a real process has competing buyers and full optionality. The instant exclusivity starts, that disappears. Every subsequent negotiation — diligence findings, working capital peg, escrow size, non-compete scope — happens with one buyer at the table and a seller who has already told their key employees, or is about to.
Two habits follow. Negotiate the structural terms, not just the price, before signing; a higher headline number with a longer earn-out and a bigger escrow is frequently a worse deal than a lower certain one. And keep exclusivity short, so extensions are something the buyer has to ask for. Thirty to ninety days is the normal band in lower-middle-market deals, with sixty typical; a 120-day no-shop with automatic renewal is a free option written to the buyer.
Retrades are common enough that the LOI should be negotiated on the assumption one is coming. What removes the buyer's material to work with is a recast where every add-back ties to a document before the LOI is signed, not after.