OnwardLesson 6.3
What a letter of intent commits you to
A letter of intent, or LOI, is your written offer. It sets the price, the main terms and how the deal will proceed.
The short version
- A letter of intent, or LOI, is your written offer. It sets the price, the main terms and how the deal will proceed.
- Most of it is not binding. A few parts are, especially exclusivity and confidentiality.
- It shapes everything after it. Terms left vague usually get harder to win later.
- Have your M&A attorney review it before you sign, and your lender see it too.
- A good LOI protects your right to walk away if due diligence or financing does not work out.
What an LOI covers
- Price and how it will be paid: cash at closing, any seller note and any money held back.
- Structure: buying the assets or the company. Lesson B6.6 covers this.
- What is included: equipment, inventory, working capital and real estate.
- Working capital target. Lesson B6.5 covers this.
- The seller's role after closing.
- Due diligence: how long you have and what you can see.
- Financing contingency: your right to walk away if the loan is not approved.
- Exclusivity: how long the seller stops talking to other buyers. Lesson B6.7 covers this.
- Confidentiality.
- Target closing date.
Binding and not binding
Most of an LOI is non-binding. Either side can usually walk away, and the price can change if due diligence finds something. The binding parts usually include exclusivity, confidentiality and who pays which costs.
Protect your way out
Two terms protect you most:
- A due diligence period long enough to check everything, with the right to walk away if you find problems.
- A financing contingency, so you are not committed if the lender declines.
Without them, you may lose a deposit or be pushed to close a deal you no longer want.
Be specific now
It is tempting to leave details for the purchase agreement. But once exclusivity starts, the seller has no other buyers, and neither side has much leverage. Settle what matters to you now: how the seller note works, what is included, the working capital target and the seller's handover.
Share it with your lender
Send the signed LOI to your lender quickly. Their review, valuation and approval all start from it.
The Prepare your letter of intent and Review a letter of intent tools help you draft one and check one you have received.
Take this to your own people
The questions for this topic, for your attorney, your accountant or your lender.
- For your M&A attorney: "What must be in this LOI to protect me, and what is missing?" Listen for: due diligence rights, a financing contingency and the terms that matter to you.
- For your lender: "Does this LOI work for your loan, or does anything need to change?" Listen for: structure, seller note terms and timing that fit their rules.
This names the question. Your CPA, your M&A attorney and your lender answer it for your situation.
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