M&A Letter of Intent: Complete Guide
Master the art of LOI negotiation with expert guidance on key terms, strategies, and best practices
Get LOI SupportWhat is a Letter of Intent?
Definition & Purpose
A Letter of Intent (LOI) is a non-binding agreement that outlines the key terms and conditions of a proposed M&A transaction. It serves as a roadmap for negotiations and establishes the framework for due diligence.
While most provisions are non-binding, certain elements like exclusivity, confidentiality, and process terms are typically binding on the parties.
Establishes serious intent to proceed
Provides exclusivity period for negotiations
Outlines due diligence process and timeline
LOI vs Other Documents
Essential LOI Components
- • Base purchase price or range
- • Payment structure (cash/stock)
- • Earnout provisions
- • Working capital adjustments
- • Escrow arrangements
- • Asset vs. stock purchase
- • Tax structure implications
- • Assumption of liabilities
- • Employee matters
- • Closing conditions
- • Due diligence scope and timeline
- • Exclusivity period length
- • Break-up fee provisions
- • Confidentiality requirements
- • Regulatory approval needs
- • Material adverse change definition
- • Key employee retention
- • Non-compete agreements
- • Financing contingencies
- • Target operating restrictions
LOI Negotiation Strategy
Key Objectives:
- • Secure exclusivity for due diligence period
- • Establish reasonable purchase price range
- • Include adequate due diligence scope
- • Minimize break-up fee exposure
- • Maintain flexibility on final terms
Negotiation Tips:
- • Be realistic on valuation expectations
- • Allow adequate time for due diligence
- • Address key deal risks upfront
- • Include necessary regulatory approvals
Key Objectives:
- • Maximize purchase price and minimize risk
- • Limit due diligence scope and timeline
- • Include meaningful break-up fee
- • Restrict operational limitations
- • Maintain competitive tension where possible
Negotiation Tips:
- • Qualify buyer financial capability
- • Set reasonable exclusivity periods
- • Protect business operations during process
- • Address employee and customer concerns
Standard LOI Terms & Ranges
| Term | Typical Range | Key Considerations |
|---|---|---|
| Exclusivity Period | 60-90 days | Balance thoroughness with market timing |
| Break-up Fee | 1-3% of transaction value | Reflects deal size and complexity |
| Due Diligence | 30-60 days | Scope should match transaction complexity |
| Earnout Period | 1-3 years | Based on business predictability |
| Escrow Amount | 10-20% of purchase price | Risk profile and warranty scope |
LOI Best Practices
- • Be specific on key commercial terms
- • Include clear binding vs. non-binding provisions
- • Address material deal risks and conditions
- • Set realistic timelines and milestones
- • Include termination and walk-away rights
- • Plan for regulatory and third-party approvals
- • Engage legal counsel early in the process
- • Document key assumptions and dependencies
- • Leave key terms undefined or ambiguous
- • Agree to unrealistic or impossible timelines
- • Accept excessive break-up fee exposure
- • Ignore material business risks or issues
- • Overlook necessary regulatory considerations
- • Fail to address financing contingencies
- • Rush negotiations without proper analysis
- • Neglect employee and customer impact
LOI Process Timeline
Week 1-2
Initial terms discussion
- • Price and structure
- • Key conditions
- • Timeline expectations
Week 2-3
LOI drafting and negotiation
- • Term refinement
- • Legal review
- • Back-and-forth negotiation
Week 3-4
LOI execution
- • Final approvals
- • Signature process
- • Announcement planning
Week 4+
Due diligence phase
- • Data room setup
- • Investigation process
- • Definitive agreement drafting
Common LOI Pitfalls
Significant gaps between buyer and seller valuation expectations that aren't addressed in the LOI.
Solution: Include valuation methodology and key assumptions
Insufficient time or scope for proper investigation leading to surprised discoveries.
Solution: Build in adequate time and comprehensive scope
Setting closing conditions or timelines that are impossible to achieve.
Solution: Realistic planning based on transaction complexity
Ready to Move from Learning to Action?
Put your knowledge to work with professional business valuation services tailored to your specific needs.