A letter of intent (LOI) in M&A is a formal document that outlines the key terms and conditions under which a buyer intends to acquire a target company. It signals serious commitment from both parties and establishes a shared framework before the full legal agreements are drafted. Think of it as a structured handshake, not the final deal, but the foundation one is built on. The sections below answer the most common questions buyers and sellers have about LOIs in practice.
What key terms does a letter of intent typically include?
A letter of intent in M&A typically includes the proposed purchase price or valuation range, the deal structure (asset vs. share purchase), payment terms, key conditions precedent, exclusivity provisions, and a confidentiality clause. These terms give both parties a clear picture of what the transaction will look like before legal documentation begins.
While the exact content varies by deal, most LOIs cover the following core elements:
- Purchase price and valuation basis – the agreed price or price range, and whether it is based on a fixed amount, an EBITDA multiple, or another metric
- Deal structure – whether the transaction is structured as a share deal, an asset deal, or a merger
- Payment terms – cash at closing, deferred payments, earnouts, or a combination
- Conditions precedent – what must happen before the deal can close, such as regulatory approvals or satisfactory due diligence
- Exclusivity period – a window during which the seller agrees not to negotiate with other potential buyers
- Confidentiality – obligations to protect sensitive information shared during the process
- Timeline – indicative milestones for due diligence, final agreement, and closing
The level of detail in an LOI can vary significantly. Some are deliberately high-level to preserve flexibility, while others go into considerable depth to minimize ambiguity in the negotiation phase that follows. Either way, the LOI sets the tone for the entire transaction.
Is a letter of intent legally binding in M&A?
A letter of intent in M&A is generally not legally binding in its entirety. Most LOIs are intentionally structured so that the commercial terms, such as the purchase price and deal structure, remain non-binding until a final agreement is signed. However, certain specific provisions within the LOI are typically binding, most commonly the exclusivity clause and the confidentiality obligations.
This distinction matters because it gives both parties the flexibility to continue negotiating while still creating enforceable commitments around process and information protection. A seller cannot simply hand over sensitive financial data without assurance that it will be treated confidentially, and a buyer needs exclusivity to justify investing time and money into due diligence.
It is important to read the LOI carefully and have legal counsel review which clauses are explicitly stated as binding. Ambiguity here can create legal exposure later. In some jurisdictions, a poorly worded LOI has been interpreted by courts as creating binding obligations even where the parties did not intend this, so precision in drafting is essential.
What’s the difference between a letter of intent and a term sheet?
The key difference between a letter of intent and a term sheet is one of format and context rather than fundamental purpose. Both documents summarize the proposed terms of a deal before a binding agreement is signed. A letter of intent is typically written in prose and reads more like a formal letter, while a term sheet presents the same information in a structured, bullet-point format. In practice, the two terms are often used interchangeably in M&A.
Where a distinction is made, it usually comes down to the following:
- Format – LOIs are narrative; term sheets are tabular or list-based
- Context – LOIs are more common in M&A transactions; term sheets are frequently used in venture capital and debt financing rounds
- Tone – LOIs can carry a more formal, letter-style tone that signals institutional seriousness; term sheets are often more concise and transactional
From a legal standpoint, neither document is inherently more or less binding than the other, what matters is the specific language used within it. Whether the document is called an LOI, a term sheet, or a memorandum of understanding, the same principle applies: check which provisions are explicitly designated as binding.
When in the M&A process is an LOI signed?
An LOI is typically signed after initial discussions and preliminary due diligence have confirmed that both parties are genuinely interested in proceeding, but before full due diligence and final legal documentation begin. It marks the transition from exploratory conversations to a structured, committed process.
In a typical M&A timeline, the LOI sits between two key milestones:
- Before the LOI: The buyer identifies and screens targets, holds initial meetings, receives a confidential information memorandum (CIM), and submits a non-binding indicative offer
- The LOI: Once the indicative offer is accepted in principle, the parties negotiate and sign the LOI to formalize the key terms and lock in exclusivity
- After the LOI: Full due diligence process and validation begins, followed by final negotiations on the purchase agreement, legal documentation, and ultimately closing
The timing of the LOI is significant because it triggers the exclusivity period, during which the seller is off the market. This gives the buyer the space to conduct thorough due diligence without the risk of a competing bidder stepping in. For sellers, it means choosing the right buyer before committing to that window, which is why the quality of the LOI’s terms matters as much as the headline price.
What happens if a party walks away after signing an LOI?
Because the commercial terms of an LOI are generally non-binding, either party can walk away from the deal without being legally required to complete the transaction. However, walking away is not without consequences. The binding provisions, particularly exclusivity and confidentiality, remain enforceable, and breaching them can result in legal liability.
Beyond the legal dimension, there are practical consequences to consider:
- For the buyer: Walking away after due diligence means losing the time and cost invested in that process. Depending on the LOI, there may also be a break fee clause that requires the buyer to compensate the seller for certain costs incurred
- For the seller: Withdrawing after signing an LOI, particularly if the exclusivity period has prevented other buyers from engaging, can damage credibility in the market and may trigger claims if the seller has breached specific terms
- For both parties: Reputation matters in M&A. Advisors, investors, and counterparties talk, and a pattern of walking away from signed LOIs can make future transactions harder to close
The most common legitimate reason for a party to walk away after an LOI is a material finding during due diligence that was not disclosed or anticipated beforehand. This is precisely why thorough preparation before signing an LOI reduces the risk of late-stage breakdown. A well-structured LOI also includes provisions for how due diligence findings can affect the price or terms, giving both parties a mechanism to adjust rather than simply walk away.
How Greyt supports you through the M&A process
Navigating an M&A transaction, from the first LOI to final closing, requires more than legal expertise. It requires financial discipline, independent validation, and a clear view of whether the deal actually creates value. That is exactly the perspective we bring at Greyt.
Working from a CFO perspective, we support buyers and sellers across every phase of the transaction:
- Finance Maturity Assessment: We establish a clear financial baseline before any LOI is signed, so both parties enter negotiations with accurate, reliable data
- Investment thesis and valuation discipline: We help you define what you are buying and why, and set valuation boundaries grounded in financial reality rather than optimism
- Due diligence coordination: We validate the assumptions behind the deal and surface risks before they become costly problems post-closing
- Negotiation support: We help structure price, terms, and conditions in a way that protects your position and reflects the actual risk profile of the transaction
- Integration and value realisation: We stay involved after closing to ensure the deal delivers what it promised, operationally and financially
Whether you are preparing to sign your first LOI or navigating a complex multi-party transaction, find out more about our M&A expert advisory services to help you make the right call, not just close the deal. Get in touch with us to discuss your M&A plans and find out how we can support you from strategy through to closing.
Frequently Asked Questions
How long should an exclusivity period in an LOI typically last?
Exclusivity periods in M&A LOIs typically range from 30 to 90 days, depending on the complexity of the transaction and the volume of due diligence required. Simpler deals with clean financials may need only 30–45 days, while larger or more complex transactions often require 60–90 days. Sellers should be cautious about granting overly long exclusivity windows without clear milestones, as this locks them out of the market without guaranteeing a completed deal. Buyers, on the other hand, should request enough time to conduct thorough due diligence rather than rushing to meet an artificially tight deadline.
What are the most common mistakes sellers make when reviewing an LOI?
One of the most frequent mistakes sellers make is focusing almost entirely on the headline purchase price while overlooking terms that can significantly erode the final amount received, such as working capital adjustments, earnout conditions, or deferred payment structures. Another common error is agreeing to a long exclusivity period without ensuring the buyer has demonstrated genuine financial readiness to close. Sellers should also ensure that any representations or warranties they are expected to make are clearly scoped and limited, as overly broad commitments can create post-closing liability. Having experienced legal and financial advisors review the LOI before signing is essential, not optional.
Can the purchase price change after an LOI is signed?
Yes, the purchase price can change after an LOI is signed, and this is more common than many first-time buyers or sellers expect. The most frequent reasons for price adjustments include material findings during due diligence, such as undisclosed liabilities, revenue quality issues, or customer concentration risks, as well as working capital true-ups at closing. A well-drafted LOI will typically include a mechanism for how due diligence findings can affect the price, such as a price adjustment clause or a defined process for renegotiation. This is precisely why the LOI's terms around price should be treated as a starting framework, not a guarantee.
Do I need a lawyer to draft or review an LOI?
While an LOI is generally non-binding on its commercial terms, having a lawyer draft or review it is strongly advisable. The binding provisions, particularly exclusivity and confidentiality, carry real legal weight, and ambiguous drafting in any part of the document can create unintended obligations or disputes down the line. In some jurisdictions, courts have interpreted loosely worded LOIs as creating enforceable commitments even when the parties did not intend this. A lawyer experienced in M&A transactions will ensure the document accurately reflects your intentions, protects your position, and is enforceable where it needs to be.
What is an earnout, and should I be concerned if one is included in the LOI?
An earnout is a payment structure where a portion of the purchase price is contingent on the acquired business meeting specific financial or operational targets after closing, such as revenue thresholds or EBITDA milestones over a defined period. Earnouts are commonly used when there is a valuation gap between what the buyer is willing to pay today and what the seller believes the business is worth based on future performance. They are not inherently negative, but sellers should scrutinise the specific metrics, measurement periods, and the degree of control they will retain post-closing, as these factors directly affect the likelihood of the earnout being paid. If an earnout is included in the LOI, ensure the terms are clearly defined and independently verifiable.
How is an LOI different from a memorandum of understanding (MOU) in M&A?
In M&A, an LOI and a memorandum of understanding (MOU) serve essentially the same purpose and are often used interchangeably. Both documents outline the key terms of a proposed transaction before a binding agreement is finalised, and neither is typically binding in full. The distinction, where one exists, is largely stylistic: an MOU can sometimes carry a slightly more collaborative or partnership-oriented tone, while an LOI is more explicitly framed as a buyer's statement of intent to acquire. What matters in either case is not the label on the document but the specific language within it, particularly which clauses are designated as binding and which are not.
What should a seller do to prepare before receiving or responding to an LOI?
Before engaging with a prospective buyer's LOI, sellers should ensure their financial records are accurate, well-organised, and audit-ready, as due diligence will scrutinise these in detail once the LOI is signed. It is also worth conducting an internal review of any potential red flags, such as customer concentration, pending litigation, or gaps in contracts, so these can be addressed proactively rather than discovered by the buyer mid-process. Sellers should have a clear sense of their valuation expectations, deal structure preferences, and non-negotiable terms before entering LOI negotiations, as arriving unprepared can result in agreeing to unfavourable terms under time pressure. Engaging a financial advisor at this stage, before the LOI is signed, significantly strengthens a seller's negotiating position.