What Should Be Included in a Letter of Intent (LOI)?

After initially exploring a transaction but before conducting a full due diligence inquiry, the parties will usually enter into a letter of intent (LOI) or term sheet.  A carefully prepared and negotiated LOI will establish critical deal terms prior to drafting and negotiating the definitive agreements.  Getting an appropriate LOI in place makes sure the parties really have the foundation for a deal in place and greatly increases the chances that the transaction will close.

Common Terms

Deal Structure

Stock, assets, or merger.

Purchase Price

How much the buyer will pay for the business, including any adjustments.

Payment Terms

Whether the purchase price will be paid in cash, equity in the buyer, an earnout or other form of contingent consideration, or through seller financing (promissory note) or a combination.

Indemnification and Escrow Terms

The specifics of the seller’s liability for representation breaches and other breaches, as well as whether a portion of the purchase price is held back to cover potential liability.

Restrictive Covenants

Limitations on the seller’s ability to compete with the business after the sale closes.

Post-Closing Management

Whether the seller’s owners, key employees, and other will stay on after closing, either permanently or to assist with the transition.

Full Due Diligence

The scope of full due diligence to be conducted.


If the parties haven’t already entered into a confidentiality / non-disclosure agreement (NDA), they will typically do so in the LOI to protect the seller’s confidential business information that will be provided during full diligence. 


Often, prospective purchasers don’t want to go to the expense of conducting full diligence and negotiating definitive agreements without the seller’s agreement not to engage in discussions with other potential purchases.  This is called an exclusivity agreement or a “no-shop.”

Definitive Agreements

LOIs often indicate whether the buyer or seller will prepare the first draft of the definitive deal documents.  In smaller deals, this can be important, because while “holding the pen” on the acquisition agreement gives a party the ability to shape the agreement to its advantage, it usually entails higher attorney fees for the time involved.

Binding or Non-Binding?


Most of the terms in LOIs are usually non-binding, although they do typically establish firm boundaries for future negotiations, absent surprises.  There are exceptions, though.  For example, confidentiality and exclusivity provisions are almost always binding.

One the other hand, it is common for broker-prepared LOIs presented as offers to be binding, pending a diligence period.  Make sure you know what you’re getting into, as it can be hard to renegotiate terms later absent significant surprises in diligence.

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