Why does Letter of Intent (LOI) matter?
It is signed at the moment negotiating leverage is highest, because the buyer wants the deal enough to write down terms but has not yet invested in diligence. Typically only the exclusivity and confidentiality clauses are actually binding; the price and structure are contingent on what diligence finds, which is exactly why a good LOI price is not a promise. Signing one still burns real time under an exclusivity clause that could otherwise be spent talking to other buyers.
What does Letter of Intent (LOI) look like in practice?
Suppose a company signs an LOI valuing it at $40,000,000 with a 45-day exclusivity period. During diligence, the buyer's finance team finds revenue concentration in a handful of accounts and legal counsel finds unresolved contract-assignment issues. The buyer comes back at $32,000,000 plus an earnout. Because only exclusivity and confidentiality were binding, the seller has no real recourse for this re-trade beyond walking away, and by then, the 45 days spent not talking to other buyers is gone.
What are the common mistakes with Letter of Intent (LOI)?
- Treating the headline number in the LOI as the actual price, rather than understanding most economic terms remain contingent on diligence.
- Signing broad, open-ended exclusivity with no firm end date, leaving the seller locked out of other conversations indefinitely.
- Treating the LOI as a formality before the "real" negotiation, rather than pushing hard on the few terms (price, structure, key employee retention, exclusivity length) that actually matter at this stage.
- Being surprised by a re-trade (a lowered price after diligence) instead of specifying up front what would justify one and preserving leverage to say no.
Related concepts
- No-Shop and Exclusivity ClauseA binding commitment, usually the only truly binding part of a letter of intent, that the seller will not solicit, negotiate with, or accept offers from other buyers for a fixed period while the current buyer completes diligence and negotiates definitive documents.
- Due Diligence Data RoomA secure, organized repository of a company's key documents (financials, contracts, cap table, IP filings, HR records) assembled for a buyer's or investor's legal, financial, and operational review before a financing or acquisition closes.
- Asset Sale vs. Stock SaleThe two basic ways to structure an acquisition, the buyer purchases specific assets and liabilities out of the company (asset sale), or the buyer purchases the company's equity itself, liabilities included (stock sale), and the choice changes who owns what, who owes what, and how much tax each side pays.
- EarnoutA portion of an acquisition's purchase price paid only if the acquired business hits agreed-upon milestones, usually revenue or profit targets, after closing, rather than all being paid upfront.