Letter of Intent (LOI) in M&A: Guide & Template

The Letter of Intent (LOI) is the pivotal document in any M&A transaction -- the moment when vague interest crystallizes into concrete terms. According to SRS Acquiom's 2024 M&A Deal Terms Study, 78% of deals that reach signed LOI ultimately close, making this the single highest-leverage negotiation point in the deal lifecycle. An LOI that is well-drafted, properly scoped, and strategically negotiated protects both parties and accelerates the path to closing. A poorly drafted one can lock a seller into a bad deal or give a buyer false security. This guide covers every component, common pitfalls, and proven negotiation strategies.

What Is a Letter of Intent?

A Letter of Intent is a written document outlining the principal terms and conditions of a proposed acquisition. It serves as the framework for the definitive purchase agreement that follows. Most LOIs are predominantly non-binding, meaning neither party is legally obligated to close the transaction. However, certain provisions within the LOI are typically binding -- and understanding which provisions fall into which category is essential.

The LOI goes by several names: Indication of Interest (IOI), Term Sheet, Memorandum of Understanding (MOU), or Heads of Terms (common in European transactions). While there are subtle differences -- an IOI is typically earlier-stage and less detailed -- the core function is the same: document mutual intent and agreed-upon economic terms before investing in expensive due diligence and legal documentation.

Binding vs. Non-Binding Provisions

This distinction is the most misunderstood aspect of LOIs. The document itself is not simply "binding" or "non-binding" -- it is a mix of both.

Key Terms in the LOI

Price and Structure

The LOI should specify whether the price is a fixed number or a range, and whether it represents enterprise value (debt-free, cash-free) or equity value. Most lower middle-market LOIs express price as a multiple of trailing twelve months (TTM) adjusted EBITDA, referencing a specific measurement period. The structure -- asset purchase vs. stock purchase -- has significant tax implications for both parties. See our EBITDA adjustments guide for how the earnings base is determined.

Earnout Provisions

If part of the purchase price is contingent on future performance (an earnout), the LOI should outline the earnout metrics (revenue, EBITDA, retention), measurement period (typically 1-3 years), and payment mechanics. According to SRS Acquiom, 30% of private M&A deals in 2024 included earnout provisions, up from 19% in 2019. Earnouts bridge valuation gaps but create significant post-closing complexity, so both parties benefit from defining terms clearly at the LOI stage.

Working Capital

One of the most commonly overlooked LOI terms. The buyer expects to receive a "normal" level of working capital at closing. If the LOI does not specify a working capital target (or at least a methodology for calculating it), the post-closing true-up can become a contentious re-negotiation of purchase price. Best practice: include a preliminary working capital peg based on the trailing 12-month average, with a true-up mechanism within 60-90 days of closing.

LOI to Closing: The Timeline

LOI vs. Term Sheet

While often used interchangeably, there are practical differences:

• LOI: A more formal document, typically 5-15 pages, often drafted by counsel. It includes narrative sections explaining the proposed transaction, conditions, and process. Standard in strategic M&A transactions.
• Term Sheet: A more concise, bullet-point format, typically 2-5 pages. Common in PE transactions where speed matters and the parties are sophisticated enough to work from shorthand. Term sheets are generally faster to negotiate.
• IOI (Indication of Interest): Even less formal -- typically 1-2 pages submitted during an auction process to express preliminary interest and a valuation range. The IOI usually precedes management meetings and detailed DD, with a formal LOI following.

Negotiation Strategies

For Sellers

• Maintain competitive tension. Even after selecting a preferred buyer, avoid making that obvious. The perception of alternatives strengthens your negotiating position. Use your teaser process to build a deep bench of interested parties.
• Negotiate the exclusivity period aggressively. The shorter the exclusivity, the more leverage you retain. Push for 45 days with a defined extension mechanism rather than a blanket 90 days.
• Define the DD scope upfront. An open-ended DD clause lets the buyer expand their investigation indefinitely. Specify categories, information types, and the data room structure.
• Include a reverse break-up fee. If the buyer walks away without cause after an extended exclusivity period, the seller has lost months and competitive momentum. A reverse break-up fee (1-3% of deal value) provides compensation.

For Buyers

• Keep the LOI flexible. Use language like "subject to satisfactory completion of due diligence" to preserve optionality. Avoid locking in specific price terms before you have validated the numbers.
• Secure adequate exclusivity. You are about to spend $200,000-$500,000+ on DD, legal, and advisory fees. Ensure you have enough time to complete your work without the seller entertaining backup offers.
• Address working capital early. Disputes over working capital targets are the leading cause of post-LOI renegotiation. Propose a methodology in the LOI.
• Include material adverse change (MAC) provisions. A MAC clause allows you to walk away if the business deteriorates significantly between LOI and closing. Define what constitutes "material."

Common Mistakes

1. Not involving counsel early enough. The LOI sets the negotiation framework for the entire purchase agreement. Having your M&A attorney review the LOI before signing can save hundreds of thousands in downstream renegotiation.
2. Agreeing to an overly broad DD scope. Sellers who agree to open-ended due diligence expose themselves to extended timelines, scope creep, and potential information leakage. Define boundaries.
3. Ignoring the working capital mechanism. Roughly 40% of post-closing disputes involve working capital true-ups (American Bar Association, 2023). Address this in the LOI.
4. Assuming the LOI price is final. The LOI price is a starting point, not a finish line. Due diligence findings can and do lead to price adjustments. Plan accordingly.
5. Signing multiple LOIs simultaneously. While technically possible (if none have exclusivity), this is ethically questionable and can damage your reputation in the market, especially with PE firms who share intelligence.

When to Walk Away

Not every LOI should be signed. Consider walking away if:

• The buyer insists on open-ended exclusivity with no defined milestones or termination triggers
• The price is below your floor and the buyer has no credible path to bridging the gap (e.g., through earnout or equity rollover)
• The buyer has a history of re-trading deals after LOI (check references with other advisors and sellers)
• Key structural terms (asset vs. stock, escrow amounts, non-compete scope) are unacceptable and the buyer refuses to negotiate
• The buyer cannot demonstrate financing capacity or a credible path to closing
• Your risk assessment reveals fundamental concerns about the counterparty

Annotated Template Sections

Below are the standard sections of an LOI with guidance on what to include in each:

Conclusion

The LOI is the most consequential negotiation point in any M&A transaction. It establishes the economic framework, sets the process timeline, and creates the binding obligations that govern the deal's progression from interest to close. Whether you are a first-time seller or a serial acquirer, the principles remain the same: be specific where it matters, preserve flexibility where you need it, and never sign without understanding which provisions will survive if the deal falls apart.

For the next steps after LOI execution, explore our guides on the due diligence process and EBITDA adjustments that buyers will scrutinize during their review.