What Is a Letter of Intent (LOI)?
What Is a Letter of Intent (LOI)?
A Letter of Intent (LOI) is the first formal document in a sale process that crystallizes a buyer’s proposed terms and your mutual expectations. It outlines the purchase price, deal structure (asset sale, stock sale, or hybrid), and any earn‑out or holdback provisions designed to capture future growth. A well‑crafted LOI will also specify the exclusivity or “no‑shop” period (typically 30–60 days), financing or board‑approval contingencies, and key transition commitments, such as employment agreements or the preservation of company culture. While generally non-binding, key terms such as exclusivity are binding, so it’s important to clarify with the buyer if anything is unclear.
Simplicity is a hallmark of a good LOI: two to three pages of clear, straightforward language that leaves little room for ambiguity. When evaluating an LOI, look beyond the headline price to ensure the structure aligns with your goals. Are earn‑out targets transparent and within your control? Is the exclusivity window reasonable, or does it give the buyer undue leverage? Does the document read collaboratively, inviting your feedback, or does it impose one‑sided indemnities and obligations?
Crucially, you should engage experienced legal counsel to review any LOI before signing. Spending a few hundred dollars on a lawyer’s letter can uncover hidden risks such as overly broad financing conditions, vague definitions, or punitive covenants that might cost you six‑ or seven‑figure headaches later. Think of the LOI as your best opportunity to negotiate material deal points and set a respectful, balanced tone for the definitive agreement. Small revisions like clarifying diligence milestones, shortening the no‑shop period, or refining indemnification provisions can make the final transaction smoother, faster, and more certain. In fact, search fund buyers often welcome structured milestones, as it helps to manage expectations and timeline risk.
Key Takeaways
Defines the deal’s framework: Outlines purchase price, deal structure (asset, stock, or hybrid), and any earn‑out or holdback provisions.
Sets expectations: Specifies exclusivity (“no‑shop”) period (usually 30–60 days), financing or board‑approval contingencies, and key transition commitments (e.g., employment agreements, cultural preservation).
Keep it concise: Best LOIs are 2–3 pages of clear, unambiguous language.
Evaluate beyond price: Ensure earn‑out metrics are transparent and achievable, exclusivity windows are reasonable, and terms feel collaborative rather than one‑sided. Deal certainty is just as important as headline value.
Engage legal counsel: A few hundred dollars for a lawyer’s review can reveal hidden risks and save you significant costs later.
Use it to negotiate: Once signed and exclusivity starts, options narrow. Use the LOI strategically as your prime opportunity to refine diligence milestones and other terms before the definitive agreement.
