A Letter of Intent (LOI) is a document that outlines the preliminary terms of a proposed business transaction or agreement before a formal contract is finalized. It signals that both parties are serious about moving forward and establishes a shared understanding of the key terms before lawyers draft the binding documents. LOIs are common in mergers and acquisitions, real estate transactions, partnership agreements, and major commercial deals. They’re not usually legally binding in their entirety, but certain provisions, like confidentiality and exclusivity clauses, typically are.
What an LOI Includes
A typical LOI outlines the structure of the proposed transaction (what’s being bought, sold, or agreed to), the proposed price or valuation, key deal terms and conditions, a timeline for completing due diligence and closing, an exclusivity period (during which the seller can’t negotiate with other buyers), and confidentiality obligations. The level of detail varies: some LOIs are one page of bullet points, others are several pages of structured terms. The more detail in the LOI, the smoother the transition to a formal agreement.
LOI in Business Acquisitions
When buying or selling a business, the LOI is the first major milestone in the transaction. It signals that the buyer has done enough preliminary evaluation to make an offer and that the seller is willing to engage seriously. The LOI is followed by a due diligence period, where the buyer verifies the seller’s financials and operations, and then by the formal purchase agreement. Understanding due diligence is essential context for anyone entering an LOI for a business acquisition.
Binding vs. Non-Binding Provisions
Most LOIs are non-binding: the parties aren’t legally required to complete the transaction. However, specific clauses are typically binding: confidentiality (protecting sensitive information shared during negotiations), exclusivity (preventing the seller from entertaining other offers during a defined window), and sometimes a break-up fee if a party walks away without cause. Know which provisions are binding before you sign; a legal review of an LOI is usually worthwhile, especially for significant transactions.
The Bottom Line
A Letter of Intent is how serious deals begin. It establishes shared expectations, unlocks due diligence access, and sets the stage for a formal agreement. Treat it as the first step in a structured negotiation, not a formality. Get legal eyes on it before signing, particularly on the binding provisions. Explore more on deal-making and business transactions in the business basics library.
