Letters of Intent in M&A: Pitfalls, Terms & Value Protection
When you’re selling or buying a small or mid-sized business, one of the first major milestones is the letter of intent (LOI). Although typically short, a letter of intent sets the tone, scope, and momentum of the deal. Getting it right can save time, reduce risk, and protect negotiating leverage. Getting it wrong can create costly detours, or derail a transaction altogether.
This article explains what a letter of intent is, why it matters, how binding and non-binding terms differ, and what practical issues owners should consider before signing.
In this article:
What a Letter of Intent Is and Why It Matters
Why Smaller Deals Often Skip Letter of Intent and When That Makes Sense
How Letters of Intents Set Expectations and Structure the Deal
Binding vs. Non-Binding: Drawing the Line Clearly
Drafting Non-Binding Language to Avoid Unintended Obligations
Conditioning the Diligence Period on Receiving Key Materials
Common LOI Pitfalls and How to Avoid Them
Avoiding Unenforceable “Agreements to Agree”
Practical Examples and Scenarios
Negotiation Dynamics: Using Letters of Intents to Preserve Leverage
When to Keep LOIs Short and When to Expand Them
Coordinating the LOI with the NDA and Process Letters
Closing the Loop: Transitioning from Letter of Intent to Definitive Agreements
Use Letters of Intent Strategically to Protect Value and Momentum
What a Letter of Intent Is and Why It Matters
A letter of intent (LOI) is a short, pre-contract document that outlines the key terms of a proposed merger or acquisition before parties invest in full diligence and a definitive purchase agreement. In practice, a letter of intent serves as a roadmap: it frames the economic deal, introduces timeline and process discipline, and allocates leverage by clarifying what is binding now and what is not. Done well, a letter of intent can accelerate a transaction, protect value, and avoid misunderstandings. Done poorly, it can lock a buyer or seller into unfavorable dynamics, create unintended obligations, or waste time on a deal that was never aligned in the first place.
Because LOIs sit at the intersection of strategy and legal risk, they are not mere formalities. They are a tool. Understanding when to use them, what to include, and how to phrase non-binding terms is essential to preserving leverage and moving efficiently toward closing.
Why Smaller Deals Often Skip LOIs and When That Makes Sense
In smaller transactions, particularly asset purchases under $250,000 or tuck-ins where parties already have strong alignment, buyers and sellers often bypass a letter of intent and move directly to a short-form definitive agreement. The logic is straightforward:
Locking terms quickly reduces uncertainty. If the parties have agreed on headline price and structure, a definitive agreement can “freeze” the economics before other bidders emerge or market conditions shift.
Time and cost discipline. Drafting and negotiating a letter of intent can consume time better spent on diligence and definitive documentation, especially when deal teams are lean and counsel costs matter.
Simpler risk profiles. Where there are fewer stakeholders, lower regulatory friction, and minimal financing contingencies, the benefit of a preliminary document may not outweigh the delay.
That said, even in smaller deals, a brief LOI can add value where:
There is a risk of drift or “deal creep.” A letter of intent forces parties to memorialize core terms, price mechanics and key conditions so that scope does not expand unnoticed. LOIs become particularly useful in arms-length transactions between unrelated parties, or broker deals where a buyer or seller has worked with a licensed business broker.
There are competing bidders. A letter of intent can secure exclusivity, focus seller resources, and prevent auction-style escalation.
Management rollover, earnouts, or post-closing employment are material. These elements benefit from early alignment to avoid late-stage surprises.
Buyers who are confident in their ability to close with limited diligence may prefer to present a near-final purchase agreement, leveraging speed to win. Sellers with multiple suitors may insist on an LOI to structure a clean process with clear expectations. The right choice turns on leverage, complexity, and urgency.
How LOIs Set Expectations and Structure the Deal
A well‑constructed letter of intent (LOI) frames the deal and reduces re‑trade risk. Economically, it should capture headline price, form of consideration, adjustments, earnout metrics, escrow ranges, and tax allocations while leaving room for diligence refinements.
Exclusivity provisions protect buyer investment and focus seller negotiations, with duration tied to milestones and clear limits on competing offers. Timelines and milestones prevent drift by setting target dates for diligence, draft agreements, regulatory approvals, and management meetings.
Finally, the LOI can flag closing conditions such as financing, HSR or foreign investment review, key consents, and confirmatory diligence scopes so expectations are right‑sized early.
By addressing economics, exclusivity, process discipline, timelines, and closing conditions, the LOI establishes structure, signals seriousness, and positions both parties for a smoother path to definitive agreements and closing
Binding vs. Non-Binding: Drawing the Line Clearly
A letter of intent typically blends binding and non-binding terms. Precision matters.
Commonly non-binding terms
Purchase price and adjustments (subject to diligence and definitive documentation).
Structure (asset vs. stock vs. merger) and tax planning.
Closing date and timeline targets.
Earnout frameworks and performance metrics.
High-level post-closing employment or consulting concepts.
Indemnity baskets, caps, and survival durations (unless parties intentionally bind them).
Commonly binding terms
Confidentiality (often by reference to a separate NDA rather than within the LOI).
Exclusivity/no-shop obligations for a defined period.
Access and cooperation for diligence, subject to reasonable limitations.
Expense allocation (each party bears its own costs).
Governing law and forum for LOI-related disputes.
Publicity restrictions regarding the transaction.
Standstill (in public company or sensitive contexts), if negotiated.
No-binding-effect clause confirming that, except for specified provisions, the LOI is not an agreement to consummate the transaction.
A practical approach is to include an explicit “Binding Effect” section listing, in a closed set, the provisions that are binding, and stating that all others are non-binding and subject to negotiation and execution of definitive agreements.
Drafting Non-Binding Language to Avoid Unintended Obligations
Courts sometimes find enforceable obligations where parties intended none, particularly where LOIs read like fully formed contracts or where the parties’ conduct suggests a binding commitment. To mitigate that risk, consider:
Using clear, repeated disclaimers. State at the outset and again in a “Binding Effect” section that no party is obligated to proceed with the transaction until definitive agreements are executed, and that the parties retain sole discretion to negotiate or terminate discussions at any time.
Avoiding promissory verbs in non-binding sections. Prefer “proposed,” “anticipated,” “preliminary,” and “subject to …” over “shall” or “will.”
Tying process to conditions. For example, “Buyer to complete confirmatory diligence over [X] days after receipt of Key Diligence Materials (defined below).”
Reserving deal discretion expressly. For example, “Any transaction remains subject to Buyer’s internal approvals [and, if applicable, financing approvals], the satisfactory completion of diligence in Buyer’s sole discretion, and execution of mutually acceptable definitive agreements.”
Separating binding terms physically and stylistically. Use headings and, if appropriate, a separate signature page or annex for exclusivity and confidentiality to emphasize the distinction.
Including an integration clause for the LOI itself. Clarify that the LOI supersedes prior communications regarding preliminary terms, and that no oral statements create obligations beyond the limited binding provisions.
Conditioning the Diligence Period on Receiving Key Materials
Without discipline, a “30‑day diligence period” can vanish while buyers wait for missing documents. To protect leverage, buyers should condition timelines on receipt of Key Diligence Materials so the clock starts when the materials arrive, not when the LOI is signed.
These materials typically include tax returns, organizational documents, cap tables, major customer and supplier contracts, leases, audited and management financials, IP assignments, employee agreements, benefits plans, compliance records, and debt instruments.
Timelines should be tied to confirmed receipt, with rolling supplementation for late‑delivered items and reasonable extensions.
Delivery can be satisfied through certified uploads to the data room, with sellers confirming completeness as of a set date.
Sensitive categories may be protected under NDA carve‑outs (e.g., customer names withheld until exclusivity), but diligence timelines should still adjust accordingly.
By structuring diligence this way, buyers reduce re‑trade risk, keep exclusivity meaningful, and align expectations early in the M&A process.
Common LOI Pitfalls and How to Avoid Them
Overbroad Exclusivity: Unconditional no‑shops drain leverage if buyers stall. Fix with time‑bound exclusivity tied to milestones and termination rights for breach or delay.
Vague Price Mechanics: “Price subject to customary adjustments” invites disputes. Fix by defining working capital targets, net debt treatment, allocation methods, and earnout metrics upfront.
Unintended Binding Obligations: Mandatory language can imply enforceability. Fix by stating non‑binding intent, limiting binding terms to a short list, and avoiding “agreement in principle” phrasing.
Omitting Key Conditions: Failing to flag financing or regulatory approvals misaligns expectations. Fix by identifying gating consents and clarifying financing support at signing.
Earnout Ambiguity: Loose metrics cause friction. Fix by agreeing on measurement, baselines, covenants, and accounting consistency early.
Ignoring Tax Implications: Tax structure impacts value. Fix by stating asset vs. equity deal form, elections, and advisor review.
Misaligned Rollover/Employment Terms: “Customary terms” risk late‑stage conflict. Fix by setting rollover %, governance rights, vesting basics, and restrictive covenants in the LOI.
Data Rights & TSA Gaps: Carve‑outs falter without transition planning. Fix by outlining TSA scope, pricing, duration, and data/IP assignments upfront.
Avoiding unforceable “agreements to agree”
Courts in both Florida and Rhode Island generally treat “agreements to agree” as unenforceable (e.g. FI Real Estate Fund Two LP v. Donda, LLC, No. 23‑13742, 2024 WL 8691234 (11th Cir. Dec. 18, 2024)). If a letter of intent (LOI) or term sheet simply states that the parties will “negotiate in good faith” or “agree on future terms” without defining essential deal terms, it creates false comfort but no binding obligation. Sellers may believe they have secured a deal, only to discover that the buyer can walk away or renegotiate critical economics later. This uncertainty undermines leverage and can delay or derail the transaction.
By anchoring key terms in the LOI, owners reduce the risk of costly renegotiation and protect value throughout the deal process. Ensure any binding commitment either fixes all essential terms or explicitly states which elements remain open and non‐binding. Consider using interim binding provisions around for example deposit obligations, exclusivity fees, and break-up fees (aka termination fees) if no definitive contract is signed to give parties real, enforceable stakes in further negotiation.
Practical Examples and Scenarios
Example 1: Small asset purchase without a letter of intent
A regional acquirer targets a local service business for a sub-[placeholder] purchase price. The parties already exchanged financials under an NDA and aligned on a simple asset deal with minimal third-party consents. The buyer proposes a short-form asset purchase agreement with clear economics (price, working capital peg), limited reps (fundamental, tax, compliance), and a small indemnity escrow. By skipping the LOI, they sign within two weeks, preserving momentum and avoiding the transactional drag of a preliminary negotiation. This works because there are few unknowns, low competitive tension, and a straightforward integration plan.
Example 2: Competitive process with exclusivity-focused LOI
A founder-led SaaS company receives multiple inbound indications. The seller uses a letter of intent to secure exclusivity with the highest-value, best-certainty buyer. The LOI sets a headline enterprise value, stock-plus-cash consideration, a working capital peg aligned to recent months, a customary indemnity cap and escrow, and a 60-day exclusivity period that commences upon delivery of Key Diligence Materials. The LOI requires a draft purchase agreement from buyer within ten business days and stipulates weekly status check-ins. By structuring exclusivity around milestones, the seller maintains pressure to progress and preserves optionality if the process stalls.
Example 3: Diligence conditioned on materials
A healthcare services buyer has regulatory and reimbursement concerns. The LOI defines Key Diligence Materials: payer contracts, licensure files, compliance audits, clinician credentialing, and claims data. The LOI states that the 45-day diligence window starts upon certification that all such items are uploaded to the data room. When the seller delivers incomplete payer files, the diligence period has not begun. This prevents timeline slippage from eroding the buyer’s exclusivity and negotiating leverage.
Negotiation Dynamics: Using LOIs to Preserve Leverage
Once the purpose of a letter of intent is clear, the next step is understanding how each side can use it to shape leverage in the deal. In mergers and acquisitions, buyers and sellers approach LOIs differently: buyers focus on exclusivity, diligence, and risk allocation, while sellers emphasize headline value, certainty of close, and protections against re‑trade. The following guidance highlights how both parties can structure LOIs to maximize outcomes and minimize surprises.
For buyers: Use the LOI to secure exclusivity contingent on timely document flow, define clear diligence scopes, and preview key legal terms (escrow, caps, survival) to reduce re-trade risk. Maintain non-binding language around economics to preserve room for diligence-driven adjustments.
For sellers: Use the LOI to lock down headline value and value-protective mechanics (e.g., tight earnout definitions, limited financing conditions), constrain exclusivity through milestones, and push for certainty of close indicators (no financing condition, equity commitment letter [if applicable]).
When to Keep LOIs Short and When to Expand Them
A short‑form letter of intent is preferred when speed and competitive tension favor quick execution. In these situations, parties rely on minimal essential terms, coupled with binding exclusivity and process disciplines, while keeping legal provisions high‑level to avoid unnecessary delay.
Conversely, an expanded LOI or term sheet is more appropriate when the business deal is complex, such as transactions involving earnouts, rollover equity, or transitional service agreements. Here, the document should capture more detailed economic and structural terms to minimize surprises later in the process, but it must still preserve its non‑binding status to avoid unintended enforceability.
Choosing the right format depends on deal dynamics: short‑form LOIs protect momentum in straightforward transactions, while expanded LOIs provide clarity and risk management in more sophisticated deals.
Coordinating the LOI with the NDA and Process Letters
The LOI does not exist in a vacuum. The letter of intent does not exist in a vacuum. It must be coordinated with the nondisclosure agreement to ensure confidentiality, standstill obligations, and use‑of‑information covenants align seamlessly, often by referencing the NDA rather than duplicating provisions.
In auction settings, LOI terms should also track seller process letters, including submission deadlines, required form, and confirmations such as financing sources, regulatory approvals, and diligence plans.
Where debt financing is contemplated, buyers may strengthen credibility by attaching an indicative financing outline or support letter at signing. Sellers and buyers are also both prudent to communicate with the financier for their requirements. Proper coordination across these documents reduces friction, preserves leverage, and signals deal readiness to counterparties.
Closing the Loop: Transitioning from LOI to Definitive Agreements
A strong LOI should accelerate drafting and keep the deal on track:
Exchange templates quickly: Buyer circulates the first draft of the definitive agreement within a set number of business days.
Set a diligence calendar: Weekly status calls, data room Q&A protocols, and clear responsibility matrices for both sides.
Align advisors early: Tax, regulatory, and specialty diligence providers briefed on LOI assumptions to focus efforts.
Track deviations: Document issues requiring economic changes promptly to avoid late‑stage surprises.
Use LOIs Strategically to Protect Value and Momentum
LOIs are not mandatory, nor are they mere formalities. They are strategic tools that shape leverage, speed, and clarity in M&A. In smaller, simple deals with high alignment, skipping the LOI and moving straight to a short-form definitive agreement can lock in terms and reduce uncertainty. In competitive or complex settings, a carefully drafted LOI creates process discipline, sets realistic expectations, and avoids costly misalignment.
The keys are precision and intent: clearly separate binding from non-binding terms; draft non-binding provisions to avoid unintended obligations; tie diligence timelines to the delivery of defined, material documents; and avoid pitfalls such as overbroad exclusivity and vague price mechanics. By treating the LOI as a pragmatic roadmap rather than a box-check, the parties can preserve value, minimize friction, and move confidently toward a successful closing.
If you are evaluating whether and how to use a letter of intent for your transaction, a tailored approach calibrated to your deal size, timing, competitive context, and risk profile will maximize certainty and protect your leverage from first discussion through closing.
FAQ on Letters of Intent in M&A
What is the primary purpose of a Letter of Intent (LOI) in M&A transactions?
A letter of intent serves as a preliminary agreement that outlines the key terms and conditions of a proposed merger or acquisition. It sets the economic framework, establishes exclusivity, and outlines the timeline and conditions for closing. While typically non-binding, it helps align expectations and provides a roadmap for the transaction.
When should a small business consider using a letter of intent?
Small businesses should consider using a letter of intent when there is a risk of deal drift, competing bidders, or complex elements like management rollover or earnouts. A letter of intent can help secure exclusivity, clarify key terms, and prevent misunderstandings, even in smaller transactions.
What are the common pitfalls to avoid when drafting a letter of intent?
Common pitfalls include overbroad exclusivity, vague price mechanics, and unintended binding obligations. To avoid these, ensure exclusivity is time-bound with clear milestones, specify price adjustments and metrics, and use clear non-binding language to prevent enforceable commitments.
How can parties ensure the diligence period is effective in a letter of intent?
To ensure an effective diligence period, condition it on the receipt of key materials such as tax returns, financial statements, and major contracts. Define these materials clearly in the LOI and specify that the diligence clock starts only upon their delivery.
What are the benefits of keeping a letter of intent non-binding?
Keeping a letter of intent non-binding allows parties to maintain flexibility during negotiations and avoid unintended legal obligations. It ensures that no party is committed to proceeding with the transaction until definitive agreements are executed, protecting both sides from premature commitments.
