Letter of Intent (LOI)

A letter of intent (LOI) is a non-binding document signed by a buyer and seller early in the transaction process that outlines the proposed terms of a business sale — including purchase price, payment structure, deal structure (asset vs. share sale), and conditions to closing. The LOI signals mutual commitment to negotiate in good faith and typically triggers exclusivity and the beginning of formal due diligence.

Most provisions of an LOI are non-binding: either party can walk away without penalty if due diligence reveals issues or the parties cannot agree on final purchase agreement terms. However, some provisions — particularly exclusivity, confidentiality, and expense-allocation clauses — are typically binding.

The LOI is an important negotiating document. Many of the terms included (purchase price, earn-out structure, holdback, working capital mechanism, and key representations) become the framework for the formal purchase agreement that follows. Sellers should have a lawyer review the LOI before signing, as its structure shapes the entire subsequent negotiation.

See also: Due Diligence, Purchase Agreement, Exclusivity, Closing.