Understanding the Letter of Intent in M&A

Scott Bushkie

Guest Columnist

November 17, 2025

In mergers and acquisitions, an Indication of Interest (IOI) and a Letter of Intent (LOI) each represent a separate step in the process.

Think of an IOI as asking someone on a date – it shows genuine interest but no commitment yet.

An LOI, on the other hand, is closer to an engagement ring.

It signals that both sides are serious and ready to move toward a formal agreement.

An IOI is a non-binding letter that outlines a buyer’s general interest in acquiring the business.

It typically includes a value range, preliminary deal structure and expectations for due diligence and seller transition.

At this stage, multiple IOIs may be received and compared side by side to determine which buyers are most qualified and aligned with the seller’s goals.

The LOI comes next, after the seller and their advisory team have narrowed the field and completed deeper buyer vetting.

That means verifying financial capability, confirming funding sources and assessing cultural fit with the management team.

The goal is to identify which buyer is not only offering the best value but is most likely to close on favorable terms.

Once the preferred buyer is selected, the LOI outlines the key terms, sets the framework for due diligence and formally establishes an exclusive negotiation period.

It’s the bridge between early-stage interest and a definitive purchase agreement.

LOIs don’t close the deal, they frame it

A typical LOI spells out the buyer’s proposed purchase price, deal structure/key legal points and timeline for diligence and closing.

Though the overall agreement to transact is usually nonbinding, certain sections are legally enforceable, and those details matter.

Binding provisions often include:

• Confidentiality: Restricts how shared information can be used and by whom
• Exclusivity (“no-shop”): Prevents the seller from negotiating with other buyers during a defined period
• Access and cooperation: Outlines what information the buyer can review and how the process will be managed
• Expenses and deposits: Specifies who pays which costs and under what circumstances deposits may be refunded

These terms help establish trust and accountability, ensuring both sides commit resources in good faith.

Key protections for sellers

An LOI can serve as a critical safety net for sellers entering an exclusive negotiation period.

A strong LOI helps protect confidential company data and discourages “window shopping” by buyers who aren’t serious.

It also clarifies timing, deliverables and next steps to keep deal momentum going.

Importantly, a well-drafted LOI can include breakup or termination provisions, such as refundable deposits or fees tied to buyer withdrawal, to reduce the risk of a buyer walking away after the company has been taken off the market.

When written carefully, an LOI can create a framework for a smooth diligence process, balancing trust with accountability and preserving the seller’s leverage as the deal progresses.

What to watch for in an LOI

Even though most LOIs are nonbinding overall, their language can have lasting consequences. 

Vague terms or omissions can limit flexibility or tilt leverage once exclusivity begins.

For example, an undefined “working capital target” or unclear “adjustments” clause can resurface late in the deal, creating tension and eroding trust at a critical stage.

A few key provisions can have an outsized impact later:

• Exclusivity period: How long are you off the market? Too long, and your leverage fades.
• Working capital targets: Make sure “normal” is clearly defined.
• Closing conditions: Look for vague contingencies that could delay or derail the deal.
• Purchase price adjustments: Clarify how debt, cash and working capital are treated.
• Breakup or termination fees: Understand what triggers them and who’s protected.

Every LOI should be reviewed by specialist M&A legal counsel before signing.

Once exclusivity starts, your ability to negotiate major changes narrows considerably. 

Well-defined terms upfront create clarity, reduce surprises and keep the transaction on track toward a successful close.