TL;DR: A Letter of Intent records agreed deal terms before formal contracts are finalised. Key sections are usually non-binding, but exclusivity and confidentiality clauses often are — understand which is which before you sign.
A Letter of Intent (LOI) — also called Heads of Terms, Term Sheet, or Memorandum of Understanding depending on context and jurisdiction — is a document prepared at an early stage of a business transaction to record the key agreed terms before a formal contract is drafted.
LOIs are used in a wide range of business contexts:
The LOI serves a practical purpose: it allows both parties to confirm they have reached agreement on the most important terms before investing the significant time and expense involved in drafting full legal documentation.
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A typical business acquisition LOI contains:
Transaction overview: The parties, the proposed structure (asset or share sale), and a one-paragraph summary of what is being transacted.
Purchase price: The headline price, the basis for calculation, and any purchase price adjustments (for working capital, net debt, etc.).
Payment structure: Cash at completion, deferred consideration, earn-out provisions.
Conditions to completion: Pre-conditions that must be satisfied before the transaction completes — regulatory approvals, financing, results of due diligence.
Due diligence: The scope, timing, and access arrangements for due diligence by the buyer.
Exclusivity: A commitment from the seller not to negotiate with other potential buyers for a defined period (typically 30–90 days). This is almost always expressed as a binding obligation.
Confidentiality: Obligations to keep the existence and terms of discussions confidential. Also typically binding.
Costs: Whether each party bears its own costs, or whether costs are shared in specific circumstances (such as the seller withdrawing without cause).
Indicative timeline: An expected timetable for completing due diligence and signing formal documentation.
Binding/non-binding statement: An explicit statement identifying which provisions are binding and which are non-binding subject to formal contract.
Governing law: The jurisdiction whose law governs the LOI.
In most LOIs for business transactions, the key commercial terms (price, structure, conditions) are expressed as non-binding — subject to completion of due diligence, negotiation of the full sale agreement, and board approval. This protects both parties from being legally committed before they have the full picture.
However, specific procedural provisions are almost always binding:
The practical effect is that you cannot walk away from due diligence and immediately approach another buyer during an exclusivity period — even though neither party is yet legally committed to complete the transaction.
Key negotiating points in an LOI include:
Exclusivity period: Sellers want a short exclusivity period (30 days); buyers want longer (90+ days) to complete due diligence. The resolution depends on the complexity of the business.
Price mechanism: Is the price fixed, or is it subject to adjustment based on audited accounts, working capital at completion, or an earn-out? Each mechanism creates different risks for buyer and seller.
Conditions precedent: Buyers want broad conditions (including satisfactory due diligence) that allow them to walk away. Sellers want narrow conditions that commit the buyer more firmly to completing.
Break fee: Some LOIs include a break fee — payable if a party walks away without cause after a certain point. More common in larger transactions.
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Try it free →| Country | Common Name | Binding Status | Key Distinction |
|---|---|---|---|
| 🇬🇧 UK | Heads of Terms / LOI | Mostly non-binding (stated explicitly) | Courts examine intent carefully |
| 🇫🇷 France | Lettre d'intention / Protocole | Can be binding; good faith obligation | Civil law good faith duties may limit withdrawal |
| 🇸🇪 Sweden | Avsiktsförklaring | Generally non-binding | Good faith considerations |
| 🇦🇺 Australia | Letter of Intent / Heads of Agreement | Non-binding unless stated otherwise | Courts examine conduct and reliance |
| 🇳🇿 New Zealand | Heads of Agreement / LOI | Non-binding unless expressed otherwise | Reliance and expectation considered |
| 🇨🇦 Canada | LOI / Term Sheet | Non-binding generally | Quebec: good faith obligations apply |
| 🇺🇸 USA | LOI / Term Sheet | Non-binding on main terms; binding on exclusivity | State law varies |
Key government resources:
MmowW Scrib🐮 can help you prepare Letters of Intent and related transaction documents as part of your business document preparation process.
Helpful tools:
MmowW Scrib🐮 is a document preparation service, not a law firm. We do not provide legal advice. Letters of Intent for significant transactions should be prepared or reviewed by a qualified attorney.
Q: Can I walk away after signing an LOI?
A: On the main commercial terms, yes — an LOI is typically non-binding, and either party can walk away before a formal contract is signed. However, if the LOI contains binding exclusivity provisions, walking away and immediately approaching other buyers may breach those provisions. Confidentiality obligations also typically survive the end of the LOI. Check the specific provisions before acting.
Q: What is an earn-out and should I include it in an LOI?
A: An earn-out is a deferred payment mechanism where part of the purchase price is contingent on the business achieving specified performance targets after completion. It bridges valuation gaps between buyer and seller, but creates potential for post-completion disputes about whether targets have been met. If an earn-out is likely to be part of the structure, it should be flagged in the LOI at a high level — the detailed mechanics are typically dealt with in the formal sale agreement.
Q: How detailed should an LOI be?
A: It depends on the transaction. For simple, well-understood transactions, a brief LOI confirming key commercial terms may be sufficient. For complex transactions, a more detailed LOI that addresses all significant commercial terms reduces the risk of disputes during formal documentation. However, an overly detailed LOI can itself become a point of dispute if parties then try to change terms during the full negotiation. Strike a balance — cover the essential terms with sufficient precision, leaving detailed mechanics to the formal agreement.
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