Letter of Intent (LOI)

Why the term matters

In acquisitions, an LOI often summarizes proposed price, form of consideration, transaction structure, diligence access, exclusivity, financing assumptions, timing and other major commercial points. Many LOIs state that the obligation to consummate the acquisition is non-binding while selected provisions—such as confidentiality, exclusivity, expenses, access or governing law—are expressly binding. The document itself controls; the label “LOI” does not determine legal effect.

What an LOI usually settles first

The LOI narrows the largest commercial variables before the parties spend heavily on diligence and documentation. Typical subjects include valuation, whether the deal is structured as a stock or asset purchase, the expected treatment of debt and cash, management rollover, financing assumptions, timing and any requested exclusivity period.

A useful LOI is specific enough to expose disagreements early without pretending that every closing detail has already been negotiated.

Non-binding does not mean irrelevant

A non-binding LOI can still shape the transaction. It anchors later negotiations, helps the buyer organize financing and diligence, and gives the seller a basis for deciding whether to stop soliciting competing bids.

The more specific the economic terms become, the more important it is to identify which provisions are intended to be legally binding and which remain subject to definitive documentation.

Some LOI provisions can be binding

Recent SEC-filed LOIs show a common structure: the acquisition obligation remains non-binding, while provisions such as due diligence, confidentiality, exclusivity, costs or governing law are expressly binding. Other LOIs can be drafted as binding documents.

The correct question is therefore not “Are LOIs binding?” It is “Which provisions does this LOI say are binding, and under what governing law?”

Price language can hide major assumptions

A headline price can be misleading if the LOI does not explain whether it assumes cash-free, debt-free treatment, a normalized working-capital level, debt-like liabilities, transaction expenses or seller rollover. A $100 million headline value can produce materially different seller proceeds depending on those mechanics.

For private-equity transactions, these assumptions should be identified before the purchase agreement turns them into detailed formulas.

Common mistakes

Treating the headline price as final cash proceeds Enterprise value and seller proceeds can diverge after debt, cash, transaction expenses and closing adjustments.

Assuming every LOI is non-binding The document may make selected provisions—or occasionally the entire LOI—binding.

Ignoring exclusivity language A short “no-shop” paragraph can materially change the seller’s negotiating leverage even when the acquisition itself is still non-binding.

Example

A sponsor proposes to acquire a company for $120 million on a cash-free, debt-free basis. The LOI states the headline value, requires satisfactory diligence, grants 45 days of exclusivity and says only the exclusivity, confidentiality and expense provisions are binding. The buyer still must negotiate a definitive purchase agreement before it is obligated to close.

Treat the LOI as the economic blueprint, not as a substitute for the purchase agreement. Small wording choices at this stage—especially around working capital, debt-like items, rollover equity, financing and exclusivity—can materially change the economics later.