What Is a Letter of Intent?
A Letter of Intent (LOI) is a written document that outlines the key terms and conditions of a proposed acquisition. It is typically submitted by a buyer after preliminary evaluation of the business — reviewing the CIM, attending a management presentation, and conducting initial analysis — and before the formal due diligence process begins.
The LOI is the most consequential document in the M&A process before the definitive purchase agreement. It establishes the framework for the deal: purchase price, deal structure, timeline, conditions, and the buyer's expectations. While most of the LOI is non-binding, certain provisions — particularly exclusivity — are binding and enforceable. Understanding what you are agreeing to when you sign an LOI is critical because it sets the negotiating dynamics for everything that follows.
According to GF Data's 2025 transaction analysis, approximately 75% of signed LOIs in the lower-middle market ultimately result in a closed transaction. That high conversion rate underscores why getting the LOI right matters — once you sign, you are on a path toward closing, and the terms you accept become the baseline for all subsequent negotiations.
LOI vs. IOI vs. Term Sheet
Before diving into LOI specifics, it is worth clarifying how the LOI relates to other preliminary deal documents that buyers may submit.
An Indication of Interest (IOI) is a preliminary, non-binding expression of a buyer's interest. IOIs typically include a valuation range (not a specific price), a general description of proposed deal structure, and a summary of the buyer's qualifications and financing capability. IOIs are commonly used in competitive sale processes where the advisor solicits initial interest from multiple buyers before narrowing the field and inviting formal LOIs from the top candidates.
A term sheet is functionally similar to an LOI — it outlines proposed deal terms — but is more commonly used in venture capital and growth equity transactions. In M&A, the terms "LOI" and "term sheet" are sometimes used interchangeably, though an LOI tends to be more detailed and is the standard document in lower-middle-market transactions.
The typical progression in a structured sale process is: blind profile distribution, NDA execution, CIM delivery, management presentation, IOI submission, IOI evaluation and shortlisting, LOI submission, LOI negotiation, LOI execution, due diligence, and definitive purchase agreement. For a comprehensive overview of this process, see our guide on understanding M&A.
Key Terms in Every LOI
While every LOI is different, the core terms are remarkably consistent across transactions. Here is what you should expect to see — and what you should scrutinize — in any LOI you receive.
Purchase Price. The total consideration the buyer proposes to pay for the business. The price may be expressed as a fixed dollar amount, a multiple of EBITDA, or a combination. Be attentive to how the price is defined: does it represent enterprise value (which includes debt that will be repaid at closing) or equity value (what the seller actually takes home)? The difference can be significant, particularly for businesses with substantial debt.
Deal Structure. How the purchase price will be paid. Common structures include all-cash at closing, a combination of cash and seller financing, cash with an earnout component, or cash with an equity rollover. The structure has major implications for the seller's risk profile, tax treatment, and ultimate proceeds. Our guide on creative deal structures explores each of these in detail.
Exclusivity Period. Also known as a no-shop provision, this is typically the most important binding term in the LOI. It prohibits the seller from soliciting, negotiating with, or providing information to other potential buyers for a specified period — usually 60 to 120 days. During exclusivity, the buyer has the sole right to complete due diligence and negotiate the purchase agreement without competition.
Due Diligence Scope and Timeline. The LOI will specify the buyer's due diligence requirements and the timeframe for completing their investigation. Typical due diligence periods range from 45 to 90 days. Sellers should pay attention to whether the timeline is realistic given the scope of diligence requested and the readiness of their documentation.
Conditions to Closing. Most LOIs include conditions that must be satisfied before the transaction can close. Common conditions include satisfactory completion of due diligence, obtaining financing (for leveraged buyers), securing key employee retention agreements, landlord consent for lease assignments, and regulatory approvals. The fewer and more specific the conditions, the stronger the LOI.
Representations and Warranties. While the detailed reps and warranties will be negotiated in the purchase agreement, the LOI may preview the buyer's expectations. Some LOIs reference "customary representations and warranties," while others specify particular areas of focus.
Escrow and Indemnification. The LOI may propose an escrow holdback — a portion of the purchase price (typically 5-15%) held in a third-party escrow account for 12-24 months after closing to cover potential indemnification claims. The escrow amount, duration, and release conditions are important negotiating points.
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Binding vs. Non-Binding Provisions
One of the most important — and most commonly misunderstood — aspects of an LOI is the distinction between binding and non-binding provisions. Most LOIs are structured so that the majority of business terms (price, structure, conditions) are non-binding, while certain procedural terms are binding and legally enforceable.
Typically non-binding: purchase price, deal structure, closing conditions, representations and warranties, escrow terms, and post-closing employment arrangements. These terms represent the buyer's current intent but are subject to modification based on due diligence findings and further negotiation.
Typically binding: exclusivity (no-shop), confidentiality obligations, expense allocation (who pays for what during diligence), governing law and dispute resolution, and the non-binding nature of the other provisions. These terms are enforceable contracts and violating them can have legal consequences.
The non-binding nature of most LOI terms does not mean they are unimportant. In practice, the price and terms established in the LOI set a powerful anchor for all subsequent negotiations. Buyers rarely increase their offer after signing an LOI — the movement is almost always downward based on diligence findings. This is why negotiating the LOI aggressively, before signing, is so critical.
For guidance on negotiating deal documents with proper legal support, see our article on legal representation in M&A.
How Exclusivity Periods Work
The exclusivity provision deserves special attention because it is the single most significant concession a seller makes when signing an LOI. By agreeing to exclusivity, you are taking your business off the market, ceasing communication with all other potential buyers, and giving one buyer sole access to your business for a defined period.
The standard exclusivity period in lower-middle-market transactions ranges from 60 to 120 days. From the buyer's perspective, exclusivity is essential — they will invest significant time and money in due diligence (legal fees, accounting fees, third-party reports) and need assurance that the seller will not accept a competing offer while they complete their work.
From the seller's perspective, exclusivity is the most valuable card you play, and you should extract concessions in return. Key negotiating points include:
- Duration. Push for the shortest exclusivity period that is reasonable given the complexity of your business. 45-60 days is ideal for well-prepared sellers; 90 days is common; anything beyond 120 days should be resisted absent compelling justification.
- Extension conditions. If the buyer requests more time, what are the conditions? The best practice is to require mutual consent for extensions and to condition extensions on demonstrated diligence progress.
- Breakup or deposit requirements. Some sellers negotiate a non-refundable deposit or breakup fee that compensates them if the buyer walks away for reasons other than legitimate diligence findings. While not standard in all markets, deposits signal buyer seriousness.
- Milestone requirements. Tying continued exclusivity to the buyer meeting specific milestones — financing commitments secured, legal review completed, management meetings held — prevents buyers from using exclusivity as a holding strategy while pursuing other targets.
The critical mistake sellers make with exclusivity is granting it too cheaply. Exclusivity should be the reward for the best LOI, not a prerequisite for submitting one. Running a competitive process through the IOI stage and only granting exclusivity to the buyer with the strongest offer maximizes your leverage. For more on managing the competitive dynamics of a sale, see our guide on maximizing business value.
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Common LOI Mistakes Sellers Make
Based on our experience advising sellers across dozens of industries, these are the most frequent and costly LOI mistakes:
- Accepting the first LOI without negotiation. Buyers expect negotiation. An LOI that looks clean on the surface may contain terms that significantly disadvantage the seller — long exclusivity periods, aggressive escrow provisions, or vague conditions that give the buyer broad latitude to renegotiate later. Always counter, even if the headline price is acceptable.
- Ignoring deal structure in favor of headline price. A $10 million offer that is 60% cash and 40% earnout is fundamentally different from a $9 million all-cash offer. The certainty-adjusted value of the earnout depends on the earnout metrics, measurement period, and the seller's ability to influence outcomes post-closing. Our earnout guide provides a detailed framework for evaluating contingent consideration.
- Signing without legal counsel. The LOI is a legal document with binding provisions. Signing without M&A-experienced legal counsel is one of the most consequential mistakes a seller can make. Your corporate attorney who handles contracts and real estate is not necessarily qualified to advise on an M&A transaction.
- Granting unlimited exclusivity. Exclusivity without a defined end date or reasonable duration gives the buyer indefinite control over your process. Always cap exclusivity with a specific end date and resist automatic extensions.
- Failing to define working capital. Many LOIs reference a working capital "peg" — the normalized level of working capital that will be delivered at closing — without specifying how it will be calculated. Leaving this undefined creates a guaranteed dispute at the closing table. Insist that the LOI include at least a methodology for calculating working capital.
- Not reading the conditions carefully. Broad conditions like "satisfactory completion of due diligence in buyer's sole discretion" give the buyer an unlimited exit ramp. Push for specific, objective conditions that limit the buyer's ability to walk away for subjective reasons.
What Happens After Signing the LOI
Signing the LOI marks the transition from the marketing phase of the deal to the execution phase. The typical post-LOI sequence proceeds as follows:
Due diligence launch. The buyer's advisors — accountants, attorneys, and potentially industry consultants — begin their formal investigation. They will submit detailed document request lists and schedule site visits, management interviews, and customer or vendor calls. Having an organized data room ready at LOI signing dramatically accelerates this phase.
Quality of Earnings analysis. The buyer's accounting firm will prepare a Quality of Earnings report that verifies the seller's financial representations, normalizes earnings, and identifies adjustments. The QoE is the single most influential diligence workstream from a valuation perspective.
Purchase agreement negotiation. While due diligence proceeds, the attorneys begin drafting and negotiating the definitive purchase agreement. This document runs 50 to 100+ pages and covers every aspect of the transaction: price and structure, representations and warranties, indemnification, escrow, non-compete provisions, transition services, and closing conditions.
Financing confirmation. If the buyer is using debt financing (common for private equity and search fund buyers), the lender will conduct its own diligence and must issue a formal commitment letter. SBA-backed loans, in particular, have specific requirements and timelines that can extend the process.
Closing. Once due diligence is satisfactorily completed, the purchase agreement is finalized, financing is confirmed, and all conditions are satisfied, the parties proceed to closing. At closing, funds are transferred, documents are signed, and ownership changes hands. The average time from LOI to closing in lower-middle-market transactions is 60 to 120 days.
The LOI is not the end of the negotiation — it is the beginning of the most intensive phase. Sellers who understand the LOI's terms, negotiate effectively, and prepare their documentation in advance position themselves for a smoother, faster path to a successful closing.
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Confused by the alphabet soup in your LOI? Our M&A Acronyms Bible decodes 136 acronyms from APA to WACC, and the full glossary defines 104 terms.