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What is a Letter of Intent for Acquisition?

A Letter of Intent (LOI), also known as a memorandum of understanding, is like a handshake in writing—a way for two sides to show they’re serious about making a deal, especially during M&A (mergers and acquisitions). It sets the rules for how the game will be played before it officially starts.

When businesses plan to buy or sell, a LOI helps outline the basics of the deal. It includes important details like who’s involved, what’s being sold, and how much money is on the table. 

Though it’s not always legally binding, it shows that both sides are ready to work together and sets the tone for the next steps, like reviewing financial details and finalizing contracts. It also ensures that the parties are on the same page about the crucial terms of the transaction.

At Portalatin Business Law Firm, we help business owners make smart decisions and protect their companies for the future. We make the legal stuff simple and clear so you can focus on your goals.

Key Takeaways

  • A Letter of Intent (LOI) outlines the key terms and intentions of an acquisition, serving as a roadmap for negotiations.
  • Important parts include identifying the parties, transaction details, price, confidentiality, binding terms, exclusivity, and timelines.
  • Drafting an LOI requires gathering information, consulting advisors, drafting key terms, negotiating, and finalizing the document.
  • Mistakes like vague language, unrealistic timelines, and lack of advisor input can lead to disputes or delays.

What is a Letter of Intent?

A Letter of Intent (LOI) is a written document between a buyer and a seller, and is often the first step in a business acquisition. It outlines the key points both sides agree on, like the price, what’s being sold (assets, shares, etc.), timeline, and other important terms that may be important to one or all of the parties. While most LOIs aren’t legally binding, they help create a framework for the deal and prevent confusion later on.

What is the Purpose of a Letter of Intent? 

A Letter of Intent (LOI) is an essential tool for aligning both parties before moving forward with detailed negotiations.

It helps clarify expectations for both the buyer and seller by outlining the most important elements of the deal. By setting these ground rules, businesses can avoid misunderstandings and avoid incurring expensive costs for due diligence and legal documentation unnecessarily.

3 Benefits of an LOI

Taking the time in investing in a Letter of Intent (LOI) can result in the following benefits:

  1. Provides a Framework: It organizes key points, like what’s being sold and for how much.
  2. Saves Time: It focuses discussions and negotiations on the most important aspects.
  3. Saves Money: It allows the parties to see if they are on the same page of a deal before investing large sums of money in due diligence and legal documents for the purchase.

What Are the Key Components of a Letter of Intent?

A hand writes on a business document, and the other hand rests on desk with other documents, a laptop and a pair of glasses shown.

A Letter of Intent (LOI) includes key elements such as  the name of the parties, description of the transaction, confidentiality, binding vs. non-binding provisions, exclusivity agreements, timelines, and closing conditions. Here’s a breakdown of what’s typically included in a LOI for an acquisition:

Identification of Parties

Clearly states who’s involved in the deal—usually the buyer and the seller.

Deal Structure and Proposed Transaction

This is often the most important part of the document and may even require legal assistance. It is where you specify what kind of purchase it will be (for example, stock purchase versus asset purchase), and the proposed price and payment structure. 

Confidentiality Clause

Allows both parties to keep the deal’s details private to avoid leaks or misunderstandings.

Binding vs. Non-Binding Provisions

Most of a LOI is non-binding, meaning it’s not legally enforceable. Some parts, however,  like confidentiality and exclusivity, can be binding. It will be valuable to specify what is and is not binding. 

Exclusivity or No-Shop Agreement

Prevents the seller from negotiating with other buyers for a set period of time, giving the buyer time to complete due diligence.

Timelines and Closing Conditions

Outlines the steps and deadlines to finalize the deal, such as time frame allotted for due diligence and closing date for signing a final agreement.

Legal Enforceability of Letters of Intent

A Letter of Intent (LOI) can feel like a formal agreement, but its enforceability depends on the specific terms included. 

To avoid disputes over enforceability, parties often rely on tools like demand letters, which help resolve misunderstandings or clarify obligations before escalating to litigation.

Are LOIs Legally Binding?

Most parts of an LOI are non-binding, meaning they outline intentions but don’t legally require either party to follow through. Certain sections, however, can be binding, like:

  • Confidentiality Clauses: Prevent sharing deal details with outsiders.
  • Exclusivity Agreements: Stop the seller from negotiating with other buyers.

How to Draft a Letter of Intent for Acquisition

To draft an effective Letter of Intent (LOI) for acquisition, gather preliminary deal information, engage with advisors, draft key sections, negotiate terms, and finalize the document with clear binding and non-binding provisions.

Creating a Letter of Intent (LOI) for acquisition requires careful planning, allowing for all important details to be addressed. While it doesn’t have to cover every aspect of the deal, it should clearly outline the main points. Here’s how to draft an effective LOI.

Gather Preliminary Information

Before drafting the LOI, both parties should discuss the basics of the deal. This includes understanding what’s being sold (e.g., assets, shares) and the proposed purchase price. This allows for alignment before putting anything in writing.

Engage Legal and Financial Advisors

Consult professionals with experience in acquisitions. A lawyer can help structure binding and non-binding sections, while financial advisors make sure the deal terms are sound and fair.

Draft the Key Sections

Draft all the key components of an LOI. This can include your deal structure, important clauses and closing conditions. Focus on clarity and precision.

Review and Negotiate

Once the initial draft is complete, share it with the other party for feedback. Be prepared for revisions as both sides adjust terms to reflect their priorities.

Finalize and Sign

After both sides agree, finalize the document. Condemn that all binding and non-binding sections are clearly stated before signing. Keep in mind that the LOI is often just the first step toward a more detailed agreement.

What is the Role of LOIs in the M&A Process?

Two people shake hands in agreement across a desk where an Ipad displays graphs, and a third person claps behind them in agreement.

A Letter of Intent (LOI) plays an important role in mergers and acquisitions (M&A) by setting the foundation of the deal, facilitating due diligence, guiding negotiations, managing risks through binding clauses, and acting as a roadmap to move the transaction through its stages. 

It acts as a guide for both parties, providing clarity and structure during complex transactions. Here’s how an LOI fits into the M&A journey.

Setting the Foundation

The LOI establishes the basic terms of the deal, including the purchase price, payment method, and what’s being acquired. This allows both the buyer and seller to understand the framework of the agreement before committing significant time and resources.

Facilitating Due Diligence

Once the LOI is signed, the buyer can proceed with due diligence—a deep dive into the seller’s financial, legal, and operational details. The LOI serves as a reference, making sure due diligence aligns with the agreed-upon terms.

Guiding Negotiations

The LOI outlines key points for negotiation, such as timelines, contingencies, and closing conditions. It helps prevent misunderstandings by specifying what has already been discussed and agreed upon.

Managing Risks

By including binding sections like confidentiality and exclusivity clauses, the LOI reduces risks for both parties. It protects sensitive information and secures a level of commitment during the negotiation process.

Acting as a Roadmap

From initial discussions to the final agreement, the LOI acts as a roadmap, guiding the transaction through its various stages. While it doesn’t cover every detail, it provides a clear structure for moving forward.

8 Common Mistakes in Letters of Intent?

Common mistakes in Letters of Intent (LOIs) can derail acquisitions, causing confusion, delays, and disputes. 

These include neglecting cultural integration, overlooking leadership team compatibility, underestimating post-merger cultural clashes, vague language, overly broad terms, unrealistic timelines, misunderstanding binding versus non-binding clauses, and failing to seek professional guidance.

1. Neglecting Cultural Integration During Negotiations

One of the most common mistakes in mergers and acquisitions is failing to address cultural integration early in the process. Deloitte reports that cultural integration issues account for about 30% of failed M&A deals, making it crucial to align company values and practices during the LOI stage.

2. Overlooking Leadership Team Integration

Another significant oversight is ignoring the challenges of integrating leadership teams. Bain & Company notes that nearly half of M&A practitioners identify poor cultural fit or difficulty blending management teams as a primary reason deals fail. Addressing leadership compatibility in the LOI can prevent costly disputes and misalignments later.

3. Underestimating Post-Merger Cultural Clashes

Even when deals are successfully finalized, cultural differences can derail post-merger operations. Financier Worldwide reveals that between 50% and 75% of post-merger integrations fail to meet their objectives due to unresolved cultural issues

Including a framework for cultural alignment in the LOI confirms that both parties are prepared to tackle these challenges.

4. Vague or Ambiguous Language

LOIs that lack clear definitions can lead to confusion. For example, phrases like “fair purchase price” or “reasonable timeline” are open to interpretation. Precise terms, such as “$1.5 million payable in three installments over six months,” eliminate ambiguity.

5. Too Many Terms

Trying to cover too much in an LOI can cause delays or disagreements. Focus on the critical points, like price, payment terms, and exclusivity, leaving detailed negotiations for later agreements.

6. Unrealistic Timelines

Setting overly aggressive deadlines for due diligence or closing can strain the process. It’s better to agree on achievable timelines that account for unforeseen delays.

7. Misunderstanding Binding vs. Non-Binding Sections

Failing to specify which parts of the LOI are legally enforceable can lead to disputes. For instance, a seller may not realize an exclusivity clause is binding until they face legal consequences for breaking it.

8. Neglecting to Consult Advisors

Drafting an LOI without input from legal and financial professionals can result in critical omissions or poorly structured terms. Professional guidance makes sure the document is comprehensive and enforceable where needed.

How to Negotiate a Strong Letter of Intent

To negotiate a strong Letter of Intent (LOI), prioritize essential deal aspects, clearly define binding versus non-binding terms, balance flexibility with protection, involve legal and financial advisors, and establish realistic timelines. A well-negotiated LOI sets the stage for a smoother process and minimizes misunderstandings.

Focus on Priorities

Start by identifying the most essential aspects of the deal for both parties. These may include purchase price, payment structure, or specific terms like non-compete agreements. Addressing these first confirms that the LOI captures the essential elements of the transaction.

Be Clear About Binding and Non-Binding Terms

During negotiations, explicitly define which sections of the LOI are legally binding. For example, confidentiality and exclusivity clauses often need to be binding, while the purchase price and closing terms are typically non-binding.

Balance Flexibility with Protection

A LOI should leave room for adjustments during due diligence while protecting core interests. For instance, a seller might want flexibility on the timeline but insist on a binding confidentiality agreement.

Involve Legal and Financial Advisors

Both parties should have advisors review the LOI to confirm it is fair, enforceable, and aligned with their goals. Advisors can also help spot potential red flags or areas of disagreement.

Build in Realistic Timelines

Agree on a timeline that works for both sides. Overly tight deadlines can add pressure, while vague timelines may delay the process unnecessarily.

Sample Template of a Letter of Intent

A Letter of Intent (LOI) template helps structure the key components of an acquisition deal. Below is a simple template with annotations to guide its use:


[Your Company Name]
[Your Address]
[City, State, ZIP]
[Date]

[Recipient’s Name]
[Recipient’s Company Name]
[Recipient’s Address]
[City, State, ZIP]

Subject: Letter of Intent for Acquisition

1. Introduction

This section introduces the LOI and its purpose.
Example:
“Dear [Recipient’s Name],
This Letter of Intent outlines the principal terms for the proposed acquisition of [Target Company Name] by [Your Company Name]. While this document is non-binding, specific provisions outlined in Sections [X, Y] are binding as noted.”

2. Transaction Overview

Details the type of transaction, such as asset purchase, stock purchase, or merger.
Example:
“[Your Company Name] intends to acquire [Target Company Name] through an asset purchase transaction.”

3. Proposed Purchase Price and Payment Terms

Specifies the offer price and payment method.
Example:
“The purchase price for the transaction will be $[Amount], payable in [Cash/Installments/Stock], subject to adjustments based on due diligence findings.”

4. Confidentiality

Outlines binding confidentiality agreements.
Example:
“Both parties agree to maintain the confidentiality of all information exchanged during this process, as detailed in this section.”

5. Exclusivity

Defines any exclusivity agreements.
Example:
“[Target Company Name] agrees not to negotiate with other potential buyers for a period of [Timeframe], commencing on the date this LOI is executed.”

6. Due Diligence

Details the timeline and scope for due diligence.
Example:
“Due diligence will commence immediately upon signing this LOI and must be completed by [Date].”

7. Closing Conditions

Summarizes the conditions that must be met for the transaction to proceed.
Example:
“The transaction is contingent upon satisfactory completion of due diligence and execution of a definitive agreement.”

8. Non-Binding Nature

Clarifies which sections are binding or non-binding.
Example:
“This LOI is non-binding except for Sections [Confidentiality, Exclusivity, Governing Law], which are intended to be legally binding.”

9. Governing Law

Specifies applicable legal jurisdictions.
Example:
“This LOI shall be governed by the laws of the State of [State].”

Sincerely,
[Your Name]
[Your Title]
[Your Company Name]


This template simplifies the LOI drafting process by focusing on essential elements while allowing for customization based on the specifics of the deal.

FAQs About Letters of Intent for Acquisition

Here are common questions people have about Letters of Intent (LOIs) and their role in acquisitions:

What Happens After an LOI Is Signed?

Once a LOI is signed, the buyer typically begins due diligence, where they thoroughly review the seller’s financials, operations, and legal standing. This phase allows the buyer to understand the risks and opportunities before finalizing the deal.

Are LOIs Necessary for Small Acquisitions?

While not always required, LOIs can help even in smaller deals. They provide a clear outline of terms, build trust, and minimize misunderstandings, making the negotiation smoother and reducing risks for both parties.

Can an LOI Be Changed After Signing?

Yes, most LOIs are non-binding, meaning terms can be renegotiated during the process. However, any binding sections, like confidentiality or exclusivity, cannot be changed without mutual agreement.

What Should Be Avoided in an LOI?

Avoid using vague language, setting unrealistic timelines, or including too much unnecessary detail. These can lead to confusion or delays. Work with advisors to confirm that the LOI is clear and focused.

How Can Disputes About LOIs Be Resolved?

Disputes are often resolved through negotiations or, in some cases, legal action if binding clauses (like exclusivity) are violated. Clear language in the LOI helps prevent conflicts.

Is an LOI Legally Required?

No, a LOI isn’t mandatory, but it’s highly recommended as it sets expectations and creates a roadmap for the acquisition process.

Contact Us for LOI Services!

A Letter of Intent (LOI) is an important document that helps businesses outline the basic terms of a deal, like buying or selling a company. At Portalatin Business Law Firm, we help business owners make smart decisions and protect their companies for the future. 

If you’re growing your business or entering the U.S. market, we make the legal stuff simple and clear so you can focus on your goals. Contact Portalatin Business Law Firm today to make sure your LOI is strong, clear, and tailored to protect your interests. Let us help you secure your next big move!

Jessica C. Portalatin

Experienced Attorney in the areas of Corporate Law, Trademark Law, Franchise Law, Contract Law and Civil Litigation.

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