A letter of intent (LOI) — also called a term sheet, memorandum of understanding (MOU) or heads of terms — is a preliminary document that records the principal terms on which a buyer and seller propose to transact. It is signed early, typically before in-depth due diligence, to confirm that the parties are aligned enough to invest in the next phase.

Typical contents

  • Price and structure — proposed purchase price (or range) and whether the deal is an asset or stock purchase.
  • Form of consideration — cash, stock or a mix.
  • Key conditions — financing, regulatory approval, board and shareholder approvals.
  • Exclusivity ("no-shop") — a period during which the seller agrees not to solicit or negotiate with other buyers.
  • Confidentiality — protection of information exchanged.
  • Timeline and an outline of next steps.
  • Expenses / break provisions — who bears costs if the deal collapses.

Binding versus non-binding

The defining feature of an LOI is that it is mostly non-binding: the price and the obligation to complete generally do not bind the parties, leaving room to renegotiate after diligence. However, certain clauses are deliberately binding — most importantly exclusivity, confidentiality and sometimes expense-sharing. Careful drafting (and clear "binding/non-binding" language) is essential, because courts can find unexpected obligations.

Purpose

The LOI aligns expectations, justifies the cost of diligence, secures a period of exclusivity for the buyer, and provides a framework that the lawyers turn into the definitive agreement.

See also

  • Due diligence — The investigation of a target company carried out before a deal is signed or closed.
  • Definitive purchase agreement — The binding contract that governs an acquisition and its terms.
  • Deal structure — How an acquisition is assembled — chiefly the choice between buying stock or assets.
  • Mergers and acquisitions — The umbrella term for transactions that combine the ownership of companies or their assets.

External resources

Practitioner guides from Main Street Wealth, an M&A advisory firm:

References & further reading

  1. Investopedia — “Letter of Intent (LOI)”
  2. Corporate Finance Institute — “Letter of Intent (LOI)”
Category: Deal process