What Is a Letter of Intent (LOI)?
A letter of intent is the document that turns a serious M&A conversation into a real deal process. In it, the buyer states the price it is prepared to pay, how the deal would be structured, how it will be financed, and the conditions that must be satisfied before signing a definitive agreement.
Most of an LOI is non-binding, meaning either side can still walk away. However, a few provisions are typically binding, most importantly exclusivity (the seller agrees not to negotiate with other buyers for a set period, often 30 to 90 days), confidentiality, and sometimes expense allocation.
What an LOI Typically Contains
The core economic terms include the purchase price or a valuation formula, such as 250 million dollars representing 10x the target's trailing EBITDA of 25 million dollars, along with whether the consideration is cash, stock, or a mix. It also usually specifies a cash-free, debt-free structure and a normalized working capital target.
Process terms cover the exclusivity window, the due diligence plan, financing contingencies, key employee retention expectations, and required approvals. Some LOIs also flag structural items like whether a portion of the price will be paid as an earnout tied to future performance.
Where the LOI Fits in the Deal Timeline
In a typical sell-side process, interested buyers first submit indications of interest, then a smaller group conducts deeper diligence and submits final bids, and the winning bidder signs an LOI or is selected on the basis of one. After the LOI, the buyer conducts confirmatory due diligence while lawyers negotiate the definitive purchase agreement.
Because exclusivity shifts leverage to the buyer, sellers and their bankers try to resolve as many contentious points as possible before signing the LOI. Once a seller is locked into exclusivity, price reductions during diligence, known as retrades, are much harder to fight.
LOI vs. Term Sheet and Why It Matters
An LOI and a term sheet serve the same purpose of documenting preliminary terms, but LOIs are the convention in M&A and are written in letter form, while term sheets are more common in venture financings and lending and read like a bullet-style grid. In practice the labels are often used interchangeably.
In banking interviews, walking through an M&A sale process from teaser to closing, including where the LOI and exclusivity fit, is a standard way to show you understand how deals actually get done.
