Why a Letter of Intent matters

A Letter of Intent (LOI) is the roadmap that captures deal essentials before parties invest time and money in a full contract. LOIs clarify the parties’ expectations on price, timelines, due diligence, and key conditions; they can accelerate negotiations and reduce expensive misunderstandings. In my practice advising buyers and sellers, a clear LOI has turned fractured talks into focused discussions, saving weeks of back-and-forth and preventing last-minute surprises.

LOIs are commonly used in business acquisitions, commercial real estate leases and purchases, joint ventures, large supplier arrangements, and even in admissions or scholarship negotiations. While the LOI itself is often non-binding, specific clauses within it can be contractually enforceable—so drafting them carefully matters.

(For regulatory context and guidance on LOI treatment in securities transactions, see SEC guidance on pre-contract communications: https://www.sec.gov/corpfin/cfguidancesht.html.)

Typical sections of a Letter of Intent

A useful LOI is concise but specific. Common sections include:

  • Transaction summary: buyer, seller, subject matter (business, property, asset), and a headline purchase price or rent structure.
  • Key economic terms: price, earn-outs, deposits, payment schedule.
  • Timeline and milestones: signing target dates, due diligence period, anticipated closing date.
  • Conditions precedent: approvals, financing contingency, satisfactory due diligence findings.
  • Confidentiality clause: restrictions on sharing sensitive information (often binding).
  • Exclusivity (no-shop) clause: prevents seller from negotiating with others for a set period (often binding).
  • Allocation of costs: who pays break fees, due diligence expenses, or legal fees.
  • Governing law and dispute resolution: state law and whether arbitration will be used.
  • Non-binding statement: language that clarifies the LOI is preliminary, except where noted.

Which parts are usually binding?

Although LOIs are framed as preliminary, courts and counterparties treat specific provisions as binding when the language shows clear intent. The provisions most often enforced are:

  • Confidentiality/Nondisclosure agreements (NDA)
  • Exclusivity/no-shop clauses
  • Reimbursement of due diligence costs or third-party fees
  • Interim obligations (e.g., deposit handling, escrow instructions)
  • Interim employment or management commitments when clearly expressed

To minimize surprises, explicitly label which sections are intended to be binding and which are not. Vague phrasing creates litigation risk.

How LOIs fit with due diligence

LOIs usually set the scope and timing for due diligence. A well-drafted LOI will:

  • Define the due diligence period and access rights to documents and management
  • State who pays for third‑party reports (valuation, environmental, title)
  • List material items that would permit a buyer to terminate without penalty (e.g., undisclosed liabilities)

If you want a practical primer on due diligence and what to request, see our guide: Due Diligence. For business acquisitions specifically, our article on Buying an Existing Business: Financing Options and Due Diligence walks through common diligence workstreams.

Real-world examples (brief)

  • Business acquisition: An LOI can state purchase price, an exclusivity period while financing is arranged, and a 30–60 day due diligence window. In one of my client engagements, adding a short exclusivity window prevented the seller from entertaining a higher offer while our buyer completed financing.

  • Commercial lease: A tenant LOI may set rent, build‑out allowances, maintenance responsibilities, and a path to the formal lease. This streamlines landlord counsel negotiations.

  • Education/admissions: An LOI or intent letter in scholarship or fellowship contexts outlines the conditions for admission, funding, or conditional placements.

Drafting best practices

  1. State intent precisely: If the LOI should be non-binding, say so and repeat it. If some clauses are binding, call them out.
  2. Use clear timeframes: Specify dates for exclusivity, due diligence, and anticipated closing. Open-ended timelines invite disputes.
  3. Define materiality: Where possible, quantify thresholds (e.g., liabilities above $50,000) that allow termination.
  4. Protect confidential information: Include a short, enforceable NDA or cross-reference a separate NDA.
  5. Limit reliance: Add a clause that parties will not rely on oral statements outside the LOI or confirmatory documents.
  6. Identify the governing law: State which state’s law governs interpretation and disputes.
  7. Plan cost allocation: Be explicit whether each side pays its own counsel or whether certain fees will be reimbursed.
  8. Attach a short checklist or schedule of documents to be delivered during due diligence.

Negotiation strategies

  • Lead with the must-haves: Put deal-breakers into the LOI to avoid wasted effort on peripheral terms.
  • Keep economic terms simple: Use a headline price formula and identify how adjustments will be handled.
  • Protect leverage: Use a limited exclusivity period just long enough to complete essential diligence.
  • Use escrow or deposit structures if you need assurance of commitment—define refund conditions.

Common mistakes and how to avoid them

  • Mistake: Treating an LOI as a mere formality. Outcome: Parties disagree later on what was promised. Fix: Treat the LOI as an important document; have counsel review it.
  • Mistake: Not specifying which clauses are binding. Outcome: Parties litigate enforceability. Fix: Label binding provisions clearly.
  • Mistake: Vague timelines and processes. Outcome: Delays, missed milestones, and friction. Fix: Add precise dates and step-by-step obligations.

Sample LOI checklist (what to include)

  • Parties and contact details
  • Transaction headline and price
  • Deposit or earnest money terms
  • Due diligence scope and timing
  • Confidentiality and exclusivity language
  • Financing contingency specifics
  • Termination and break‑fee terms
  • Governing law and dispute resolution

When negotiations fall apart

If negotiations stop after an LOI, outcomes depend on the LOI’s wording. If the LOI included a binding confidentiality or exclusivity clause, breaches may trigger damages. If the LOI was plainly non-binding, the aggrieved party’s recourse may be limited. Always include exit language (e.g., how deposits are refunded) so parties can disengage cleanly.

Practical red flags to watch for

  • Overly broad confidentiality that restricts normal business operations
  • Long, undefined exclusivity periods that lock a seller without a committed buyer
  • One-sided cost allocation that leaves small creditors or vendors unpaid
  • Absence of a termination clause for failed financing

Working with counsel and advisors

An LOI is a negotiation tool and a legal document. Have experienced transactional counsel review or draft the LOI. Lenders, accountants, and tax advisors should also weigh in when price allocation, earn-outs, or tax-sensitive items are present. For regulated transactions or securities-related deals, follow relevant agency guidance such as the SEC’s materials on pre-contract communications (https://www.sec.gov/corpfin/cfguidancesht.html).

After the LOI: next steps

  1. Execute confidentiality and exclusivity terms if not already in effect.
  2. Start your due diligence checklist and schedule regular update meetings.
  3. Prepare the definitive agreement (purchase agreement, lease, partnership agreement) using the LOI as the roadmap.
  4. Negotiate exhibit lists and schedules (employee lists, contracts, title reports).
  5. Close and document any post-closing obligations (escrow releases, indemnity escrows).

Further reading and resources

And for practical checklists related to diligence and acquiring a business see: Due Diligence and Buying an Existing Business: Financing Options and Due Diligence.

Final thoughts

A Letter of Intent is a small document with outsized importance. When you draft or sign one, be explicit about which sections you expect to be binding, what due diligence is required, and how costs and timelines will be handled. In my experience, taking the time to make a concise, well-structured LOI reduces deal risk and improves the odds of a clean closing.

Disclaimer: This article is educational and based on general transactional practice; it is not legal or tax advice. For advice tailored to your situation, consult a licensed attorney and your financial advisor.