What is Letter of Intent?
Short answer: A letter of intent, or LOI, is a pre-contract document that records the parties' current agreement on transaction structure, value, diligence and process. Most commercial terms may be non-binding, while selected provisions such as confidentiality, exclusivity, costs or governing law can be binding.
An LOI sits between early discussions and definitive transaction documents. In a company sale it may describe the shares or assets, consideration structure, cash and debt assumptions, management rollover, financing, approvals, expected diligence and target timetable. It is more developed than an initial expression of interest but does not normally contain the complete protections found in a share or asset purchase agreement. The practical distinction from a term sheet is often naming rather than substance, so the wording controls. Sellers use the LOI to judge value and certainty before granting deeper access. Buyers use it to secure a workable basis for diligence and internal approval.
How it works
Negotiators should state which sections are intended to bind, when obligations start and end, and what happens on termination. Value language should identify whether the figure is enterprise or equity value and describe expected adjustments. Conditionality should cover financing, investment committee, regulatory filings, third-party consents and satisfactory diligence without disguising major uncertainty. Exclusivity needs a defined period, permitted contacts and remedies. The parties should also address publicity, access, employee approaches, costs and governing law. Common mistakes are signing before tax structure is tested, accepting vague rollover economics, including an unrealistic timetable and calling the whole document non-binding while using mandatory language elsewhere.
Example
A buyer proposes enterprise value of 120 on a cash-free, debt-free basis with normal working capital. It expects to fund 70 with debt, requires investment-committee approval and asks for 45 days of exclusivity. The seller adds a requirement that financing evidence be delivered within ten days, limits exclusivity to named buyer affiliates and makes the value, diligence and completion provisions expressly non-binding. Confidentiality, exclusivity, access rules, costs and governing law are expressly binding. During diligence, debt-like items of 6 emerge. Because the LOI did not define those items exhaustively, the final equity proceeds remain open for negotiation rather than being mechanically fixed at 114.
Why it matters
For sellers and boards, the LOI is a decision gate: it tests whether the likely proceeds and completion path justify disruption, exclusivity and disclosure. Buyers and private-investment teams use it to align deal leadership, financing and approval bodies before spending heavily. Management uses it to plan data access and workload without treating completion as certain. A precise LOI can expose disagreements early, but excessive detail can consume time without providing the certainty of definitive documents.
Courts may infer binding obligations from wording, conduct, local pre-contract duties or an obligation to negotiate in good faith. Competition law can restrict coordination before control transfers, and securities or takeover rules can impose disclosure requirements. Tax, employment and regulatory structure should be tested before commercial positions harden. Each party should obtain legal advice and ensure that public statements, board records and communications remain consistent with the intended status of the LOI.