Letters of Intent in M&A: Terms That Move the Deal

October 1, 2026 · 8 min read · Capital Markets Law Group, LLP

A letter of intent looks like a formality. It is not. The LOI sets the deal's perimeter: price and structure, exclusivity, diligence scope, and the handful of terms that determine who holds leverage for the rest of the transaction. By the time the purchase agreement is drafted, most of those decisions are already locked. A well-negotiated LOI costs a few days and saves weeks; a sloppy one quietly hands the buyer (or the seller) the upper hand for the rest of the deal.

Key Rules

Most LOIs are expressly non-binding as to the transaction itself, with binding carve-outs for exclusivity, confidentiality, and expenses.
The three provisions that move value: purchase price and its structure (cash, earnout, rollover equity), exclusivity, and diligence scope.
Exclusivity periods commonly run 30 to 60 days; longer periods shift leverage to the buyer.
Sellers should resist granting exclusivity before the buyer has shown proof of funds and a realistic timeline.
Every dollar of the price should be traceable to a defined concept: enterprise value, equity value, or cash-free debt-free, with working capital pegs spelled out.

What an LOI Actually Fixes

Read an LOI as a map of the purchase agreement. It usually covers:

Price and structure. Headline number, what is included (asset or equity deal), and any earnout, seller note, or rollover.
Exclusivity. A no-shop provision, its duration, and what triggers early termination.
Diligence scope and timeline. What the buyer gets to review and by when. Overbroad access creates seller risk; too narrow an invitation stalls the deal.
Key deal terms. Conditions precedent, financing contingency, treatment of existing debt and options, and management's post-closing role.
Governing terms. Confidentiality, expense allocation, and in some deals a deposit or break-up fee.

Once those are agreed, the purchase agreement largely formalizes them. Terms not fixed in the LOI tend to drift toward the drafter's preference later.

The Provisions That Move Value

Three LOI terms do most of the work:

Purchase price structure. A $10 million all-cash deal and a $12 million deal with $6 million in earnouts are not the same offer. Earnout metrics, measurement periods, and who controls the levers of the metric (spend, hiring, pricing) need to be in the LOI, not discovered in the purchase agreement.
Exclusivity. The buyer wants it; the seller should price it. An exclusivity period is a cost to the seller, and its length, conditions, and early-exit triggers belong in the negotiation, not the boilerplate.
Diligence scope. A focused scope keeps the deal moving and the seller's information protected. An open-ended scope invites renegotiation and fishing expeditions.

Buy-Side and Sell-Side Leverage

Leverage at the LOI stage mostly comes from alternatives. A seller with a credible competing bidder, or with the ability to keep the process alive, negotiates differently from one who has already signaled that this is the only buyer. A buyer with committed financing and a clean source of funds negotiates differently from one asking the seller to trust an undisclosed capital stack. The LOI is where each side's actual alternatives get priced into the terms.

Common Drafting Traps

Leaving the working capital peg or cash-free/debt-free definition to be sorted out later. The purchase agreement will not sort it out favorably by accident.
Agreeing to a long exclusivity period before the buyer has provided proof of committed financing.
Silent treatment of existing options, warrants, or debt, which then get valued in the purchase agreement at the buyer's assumption.
No expense-reimbursement provision in a heavily-negotiated deal where the seller spends real diligence money.
A "binding agreement" clause that is accidentally binding, or a non-binding clause that accidentally binds on key terms.

These traps are common because the LOI feels informal. It is not; it is the first negotiated document of the deal and it shapes every later one.

Book a Consultation

This post is general legal information, not legal advice, and it does not create an attorney-client relationship. Questions in this area turn on the specific facts of your matter. Contact the firm for advice on your situation.

Frequently Asked Questions

Is a Letter of Intent Binding?

Usually not. LOIs are drafted to be non-binding as to the deal itself, but typically contain binding provisions for exclusivity, confidentiality, and sometimes expense reimbursement. Read the binding-terms section carefully before signing either way.

How Long Should an Exclusivity Period Run?

Thirty to sixty days is common for lower middle-market deals. Too short and the buyer loses diligence continuity; too long and the seller loses leverage and market check options if the deal stalls.

What Happens If the Buyer's Diligence Finds a Problem After We Sign an LOI?

The buyer can renegotiate price or terms, walk away if exclusivity has ended, or close at the original terms. The LOI should address who bears diligence costs and whether a price adjustment mechanism exists, because this scenario is common enough to plan for.

Do I Need a Lawyer to Review an LOI?

Yes. The LOI sets the deal perimeter: exclusivity, diligence scope, price structure, and key terms the purchase agreement will build on. Terms fixed in the LOI rarely move afterward, so this is the cheapest moment to fix them correctly.

What Is a No-Shop Clause?

An exclusivity provision in which the seller agrees not to solicit or negotiate with other buyers for a defined period. Sellers should make it mutual or time-limited, and pair it with a fiduciary out for public-company boards.