What is a letter of intent?
A letter of intent is the document a buyer sends to set out the principal terms on which it proposes to acquire a target: the price, the structure, the conditions, and the timeline. It marks the transition from exploring a deal to actually committing to negotiate one.
The LOI is mostly non-binding — neither side is obligated to close on its terms — but it almost always contains a few provisions that are binding, most importantly exclusivity, confidentiality, and an allocation of costs. The substance, like price, remains subject to confirmatory diligence and a definitive agreement.
Its real function is to align the parties on the shape of the deal before either spends heavily on lawyers and accountants. By signing, the seller agrees to stop shopping the asset for a set period, and the buyer agrees to commit the resources to diligence it seriously.
What an LOI actually contains
Most letters of intent cover a standard set of points, with the binding and non-binding portions clearly separated.
- Price and structure. The proposed purchase price (or a range), and whether the deal is an asset purchase, a stock purchase, or a merger.
- Form of consideration. Cash, stock, rollover equity, earnout, or some mix — and any holdbacks or escrow.
- Exclusivity. A binding period — often 30 to 90 days — during which the seller cannot solicit or negotiate with other buyers.
- Conditions. What must happen before close: satisfactory diligence, financing, board and regulatory approvals.
- Confidentiality and costs. Binding terms governing information and who bears expenses if the deal collapses.
The price in an LOI is an opening position, not a guarantee. It is explicitly conditioned on diligence confirming the assumptions behind it, which is why a buyer can — and often does — revise it downward later if diligence surfaces problems.
Why the binding/non-binding line matters
The most common misunderstanding about an LOI is that signing it commits the parties to the deal. It does not. The price, structure, and conditions are non-binding statements of intent that either side can walk away from. What binds are the exclusivity, confidentiality, and cost provisions.
That asymmetry is the point. The seller gives up its leverage — the ability to run a competitive process — in exchange for the buyer's commitment to spend real money diligencing the business. A buyer who signs an LOI and then re-trades the price aggressively is, in effect, exploiting that surrendered leverage, which is why sellers negotiate the exclusivity period and any go-shop rights carefully.