Letter of Intent (LOI): M&A and Financing Terms Explained

Letter of Intent: What It Binds and What It Doesn't

A Letter of Intent (LOI) — also called a term sheet in financings or memorandum of understanding in partnerships — captures the key economic terms of a deal before lawyers draft definitive documents. Mostly non-binding, but the parts that ARE binding (exclusivity, confidentiality, expenses) determine your leverage for the next 30-60 days.

Binding vs. non-binding sections

Non-binding: valuation, structure, timing, closing conditions. Binding: exclusivity/no-shop, confidentiality/NDA, expense reimbursement if deal breaks, sometimes break-up fees. When you sign an LOI, you commit to the binding provisions immediately — the rest is a framework for negotiation.

Exclusivity: the highest-stakes term

Standard exclusivity: 30-45 days from LOI signing. During exclusivity, you cannot solicit or engage with other offers. Extension provisions: automatic extension if diligence is delayed for buyer-caused reasons. Push for: shorter exclusivity (30 days max), buyer-caused-delay carve-outs, right to terminate if diligence exceeds a specific timeline.

Reverse break-up fees

Reverse break-up fee: buyer pays if they walk away. Standard in M&A above $500M: 3-6% of deal value. Rare below $100M. In financings: reverse fees are unusual (investors expect free option to walk during diligence). Ask for them anyway in competitive rounds — sometimes granted.

What to negotiate before signing

Exclusivity length and carve-outs. Expense reimbursement caps ($100K-500K typical). Termination triggers if buyer's diligence uncovers no material issues but they still walk. Standstill provisions if the buyer is a strategic competitor. Confidentiality survival (some obligations extend 2-5 years post-termination).

Frequently asked questions

Should we sign an LOI without a lawyer reviewing it?

No — the binding sections (exclusivity, expenses, confidentiality) create real obligations. A 2-hour legal review can save weeks of pain if the deal falls apart.

Can we shop the deal during exclusivity?

No — that's what exclusivity means. Even signaling to other parties can breach the LOI. If a superior offer arrives unsolicited, you can accept only if the LOI has a fiduciary out or the exclusivity expires.

How different is an LOI from a term sheet?

In practice, functionally identical in financings and M&A. "Term sheet" is more common in venture financings; "LOI" is more common in M&A. Same binding/non-binding structure.

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