What is a Letter of Intent (LOI) in M&A?
A Letter of Intent (LOI) — also called a Term Sheet, Heads of Terms, or Memorandum of Understanding depending on the jurisdiction — is the document that sets out the principal commercial terms of a proposed M&A transaction before formal documentation begins. Signing an LOI is a significant milestone in any sale process, but it is also where sellers who are not properly advised often make their most costly mistakes.
What an LOI includes
A typical M&A LOI covers: the proposed enterprise value and equity consideration, including any adjustments for cash, debt, and working capital; the deal structure (share purchase vs. asset purchase); the exclusivity period during which the buyer has the right to complete diligence and negotiate final documentation; conditions to closing; the proposed timeline for completing due diligence and signing the SPA; key employment and post-closing arrangements for the management team; and any significant assumptions underpinning the valuation (normalised EBITDA figure, assumption about working capital peg). The detail in the LOI varies significantly — some LOIs are one page; others are ten pages and set out many terms that will ultimately appear in the final SPA.
What is binding and what is not
An LOI is typically non-binding on the commercial terms — meaning neither party is legally committed to complete the transaction at the agreed price if circumstances change. However, certain provisions are binding: the exclusivity clause (the seller cannot solicit or negotiate with other buyers during the exclusivity period), the confidentiality obligations, and the break fee provisions where agreed. This distinction matters. A seller who signs an LOI and then receives a better offer during the exclusivity period is contractually prohibited from acting on it. Understanding the exclusivity terms — their length, their scope, and the conditions under which they can be terminated — is one of the most important elements of LOI review.
The exclusivity trap
Exclusivity is the most significant constraint in an LOI for sellers. Once you sign, your negotiating leverage diminishes substantially — you cannot use competing interest to maintain pressure on price or terms. Buyers understand this and will use the exclusivity period to run extensive diligence, surface issues, and negotiate price reductions. Sellers who enter exclusivity with a single buyer, before receiving competing bids, are in the weakest possible negotiating position. The right approach is to run a competitive process, receive multiple LOIs, and select the best one — giving the winning buyer exclusivity to complete, not to explore.
Price adjustment mechanics in the LOI
The enterprise value stated in an LOI is not the amount the seller receives. The equity value — what actually lands in the seller's bank account — is calculated as enterprise value, minus debt and debt-like items, plus excess cash, and then adjusted for actual vs. normalised working capital at closing. The working capital peg — the 'normal' level of working capital the business is assumed to have at close — is a significant and often contentious negotiation point. Sellers who do not understand how the working capital adjustment works when signing the LOI frequently receive less at closing than they expected.
When the price changes after LOI
Receiving an LOI at an agreed enterprise value does not guarantee you will receive that value at closing. Price re-trades — where the buyer seeks to reduce the price after exclusivity is granted, typically citing issues surfaced in due diligence — are one of the most common and frustrating experiences for sellers. They are also partially preventable. Sellers who have run thorough preparation, commissioned a sell-side QoE, and been transparent in their process materials reduce the scope for legitimate re-trade arguments. A well-run competitive process with multiple credible bidders also reduces re-trade risk — buyers who re-trade aggressively in competitive processes risk losing the deal to a competing bid.
Key takeaways
An LOI sets out the principal commercial terms of a proposed M&A transaction before formal documentation begins.
Commercial terms in an LOI are typically non-binding; exclusivity, confidentiality, and break fees are typically binding.
Exclusivity is the most significant constraint for sellers — once granted, negotiating leverage diminishes substantially.
The equity value at closing differs from the enterprise value in the LOI due to debt, cash, and working capital adjustments.
Price re-trades after LOI are common — preventable through thorough preparation, a sell-side QoE, and a competitive process.
Related M&A terms
Continue building your M&A knowledge with these related guides.
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