LOI Meaning: What a Letter of Intent Actually Says (And What It Doesn’t)

LOI stands for ‘Letter of Intent.’ It’s the document a buyer sends a seller to formalize a proposed deal before either side has spent the time and money to draft a binding purchase agreement. The LOI lays out price, deal structure, key terms, and the path from signature to close.

An LOI is not a contract to sell the business. Most of the LOI is non-binding — price and structure are proposals that can change during diligence. The buyer can lower the price after looking at the books. The seller can walk if the diligence becomes invasive. Neither side is locked into the headline terms.

Two clauses inside the LOI are typically binding. Exclusivity (the ‘no-shop’ clause) prevents the seller from negotiating with other buyers for 60-120 days. Confidentiality requires both sides to keep the deal terms and the diligence findings private. These two clauses have legal force the moment the LOI is signed.

Signing an LOI is a meaningful commitment of time, momentum, and leverage. Once the LOI is signed, the seller has effectively committed to working with one buyer for the next 2-4 months. Other buyers are off the table. If the deal doesn’t close, the seller restarts the process — often months behind schedule and with reduced leverage. Understanding what an LOI is (and isn’t) is the first step in protecting yourself.

“An LOI is mostly non-binding — except for the two clauses that lock you in for 60-120 days: exclusivity and confidentiality.”

Key Takeaways

• LOI = Letter of Intent. A 4-8 page document outlining the proposed terms of a business sale.
• Most of an LOI is non-binding: price, structure, earnout terms, and working capital are proposals subject to diligence.
• Exclusivity and confidentiality clauses are binding and enforceable from the moment the LOI is signed.
• Typical LOI exclusivity period: 60-120 days. The seller cannot shop the deal during this window.
• An LOI is signed after the buyer has reviewed initial financials and the seller has chosen the buyer they want to work with.
• After the LOI: diligence (45-75 days), drafting the Definitive Purchase Agreement (30-45 days), then close. Total: 60-120 days from signature to wire.

What does LOI stand for?

LOI stands for ‘Letter of Intent.’ It’s a written document, usually 4-8 pages, that a buyer presents to a seller to formalize a proposed transaction. The LOI says: ‘Here is what we’re willing to pay, here is how we want to structure the deal, here is the timeline, and here is what we need from you in order to close.’

The term ‘LOI’ is the M&A industry standard. You’ll occasionally see ‘Indication of Interest’ (IOI), ‘Term Sheet,’ or ‘Memorandum of Understanding’ (MOU) used in similar contexts. Each has slight differences. In the lower-middle market ($1M-$25M EBITDA deals), LOI is the dominant term.

An LOI is not the same as a Definitive Purchase Agreement. The Definitive Purchase Agreement (often called a ‘DPA,’ ‘SPA’ for stock purchase, or ‘APA’ for asset purchase) is the binding 80-150 page contract that actually transfers the business. The LOI is the high-level proposal that sets the framework for the DPA. The LOI is to the DPA what an offer letter is to an employment contract.

LOIs are short, plain-English, and intentionally non-binding on the commercial terms. The point of an LOI is to align both parties on the major terms before lawyers spend $50k-$200k drafting a definitive agreement. If the price, structure, and timeline don’t work in the LOI, they certainly won’t work in the DPA — so the LOI is the cheap way to find out.

What’s actually inside an LOI?

An LOI typically covers nine areas. Purchase price (the headline number). Deal structure (asset sale vs. stock sale). Form of consideration (cash, rollover equity, seller note, earnout). Working capital target. Key conditions to close (financing, third-party consents, regulatory approval). Diligence scope and timeline. Exclusivity period. Confidentiality. Expense allocation if the deal breaks.

Purchase price is usually expressed as a range or as a function. Some LOIs say ‘$10M’ flat. Others say ‘6.5x trailing twelve months Adjusted EBITDA, with a target of approximately $10M’ — which gives the buyer room to lower the price if Adjusted EBITDA shrinks during diligence. Sellers should push for a fixed dollar number whenever possible.

Deal structure decides who pays the taxes. Asset sales benefit the buyer (step-up in basis, no inherited liabilities) and hurt the seller (often higher tax burden because of depreciation recapture and state-level differences). Stock sales benefit the seller (single layer of capital gains tax) and force the buyer to inherit unknown liabilities. The LOI should specify which structure is being used.

Form of consideration is where deals get complicated. Most lower-middle-market deals are not 100% cash at close. The buyer might pay 70% cash + 10% rollover equity + 10% seller note + 10% earnout. The LOI should break out exactly how the price is being paid. A $10M headline with $3M in earnout is very different from $10M all cash.

What’s binding in an LOI — and what’s not

The commercial terms in an LOI are non-binding by design. Price, structure, working capital target, earnout formula, escrow size — all of these are proposals. The buyer can revise downward after diligence reveals customer concentration, owner dependency, or weak QoE-adjusted EBITDA. The seller can refuse the revisions and walk.

Exclusivity is binding and enforceable. When you sign an LOI with an exclusivity clause, you’ve made a contractual promise not to negotiate with other buyers, not to provide diligence materials to other parties, and (in some versions) not to even respond to inbound inquiries. Breach of exclusivity can result in damages or specific performance lawsuits.

Confidentiality survives the LOI. Even if the deal blows up, the buyer can’t share what they learned during diligence. Customer lists, financial data, employee information, vendor contracts — all confidential. The confidentiality obligation typically extends 2-3 years past the LOI termination.

Other clauses can be made binding by specific language. Some LOIs include a ‘break fee’ (the buyer or seller pays the other side $X if they walk away without cause). Some include binding diligence cooperation requirements. Sellers should read the LOI carefully and identify every clause prefixed with ‘binding’ or that lacks the ‘non-binding’ qualifier.

When is an LOI signed in the M&A timeline?

The LOI is signed roughly halfway through the sale process. Before the LOI: the seller hires an advisor, prepares materials (CIM, financials, data room), markets the business to qualified buyers, and reviews initial bids. Buyers submit indications of interest (IOIs) with rough pricing. Top buyers get invited to management meetings and submit revised bids.

The LOI is signed after the seller picks a winner. The seller (with their advisor) reviews the final bids, picks the buyer they want to work with, and negotiates the LOI. This often takes 30-60 days from initial buyer outreach. The LOI represents the seller’s commitment to work exclusively with one buyer for the next 60-120 days.

The LOI triggers full diligence and DPA drafting. Once the LOI is signed, the buyer’s deal team (financial DD, legal DD, operational DD) gets full access to the data room. Quality of Earnings work begins. Lawyers start drafting the Definitive Purchase Agreement. The seller’s management team commits substantial time to diligence requests.

Total timeline from LOI to close: 60-120 days. Most lower-middle-market deals close 75-100 days after LOI signature. Faster (45-60 days) is possible for clean deals with simple structures. Slower (120-150 days) is common for deals with regulatory approval, complex tax structuring, or financing contingencies.

LOI vs. MOU vs. term sheet: what’s the difference?

LOI is the M&A industry standard term. In a business sale (lower-middle market, $1M-$25M EBITDA), the document you’ll see is almost always called ‘Letter of Intent’ or ‘LOI.’ That’s the term private equity firms use. That’s the term strategic buyers use. That’s the term you should use when discussing the document with your advisor.

Term sheet is shorter and more common in venture capital. Term sheets are typically 1-3 pages and used in VC investment rounds. They list bullet-point terms (valuation, board seats, liquidation preferences) without much narrative. In M&A, term sheets sometimes appear in early indication-of-interest stages, but the formal pre-DPA document is usually called an LOI.

MOU (Memorandum of Understanding) is for partnerships, not acquisitions. MOUs are common in joint ventures, strategic alliances, government partnerships, and academic collaborations. They describe a multi-party understanding rather than a buy/sell transaction. If you see ‘MOU’ in an acquisition context, it’s usually because someone is using non-standard terminology — ask your advisor to clarify.

Indication of Interest (IOI) comes before the LOI. An IOI is a buyer’s preliminary bid — usually 1-2 pages, with a price range and high-level structure. IOIs are submitted by multiple buyers during the marketing phase. The seller picks the best 2-4 IOIs, invites those buyers to management meetings, and ultimately signs an LOI with one of them.

Why exclusivity is the most important clause in an LOI

Exclusivity locks the seller into one buyer. Once you sign an LOI with a 90-day exclusivity period, you’ve committed to working only with that buyer for 90 days. You can’t respond to other inbound inquiries. You can’t solicit competing bids. You can’t even mention the deal to a third party who might bid higher. Your leverage drops.

Buyers use exclusivity to lower prices during diligence. It’s an open secret in M&A that buyers sometimes sign aggressive LOIs at high prices to win exclusivity, then ‘retrade’ (lower the price) during diligence by citing diligence findings. Common retrade triggers: customer concentration, unrecorded liabilities, working capital adjustments, owner-dependency. By the time the seller realizes the price has dropped, exclusivity prevents them from going back to other buyers.

Sellers should negotiate exclusivity carefully. Push for the shortest possible exclusivity period (45-75 days instead of 90-120). Add ‘automatic termination’ triggers if the buyer doesn’t deliver on key milestones (financing commitment letter by Day 30, draft DPA by Day 45). Insert a ‘material adverse change’ clause that lets the seller walk if the buyer materially changes terms.

Exclusivity is what makes the LOI ‘real’ for both parties. Without exclusivity, the buyer wouldn’t spend $200k-$500k on diligence (they’d be afraid you’d sell to someone else). Without exclusivity, the seller wouldn’t take their business off the market. The exclusivity clause is what turns the LOI from a wish list into a working framework.

What happens if the LOI breaks down?

Most LOIs ‘close’ (i.e., result in a signed DPA and wire transfer). Some don’t. Roughly 70-80% of signed LOIs in the lower-middle market reach close. The other 20-30% break for various reasons: diligence findings (customer concentration, weaker-than-claimed Adjusted EBITDA), buyer financing falling through, market conditions changing, or seller losing confidence in the buyer.

If the LOI breaks, the seller restarts the sale process. The deal team disbands. The seller has to re-engage with the previously-passed buyers (often at lower valuations, since other buyers know there were diligence problems with the lead buyer). New management meetings, new IOIs, new LOI — usually 60-120 days of additional process.

Confidentiality survives the LOI termination. Even after the deal blows up, the failed buyer can’t use what they learned. They can’t share customer lists with competitors. They can’t share financial data publicly. They can’t poach key employees (if the LOI included a no-hire clause). The confidentiality obligation continues.

Expense allocation usually defaults to ‘each party bears own.’ Unless the LOI has a break fee, both sides eat their own legal and advisory costs when a deal falls apart. Sellers can be out $50k-$150k in advisor fees, legal review, and QoE prep. Buyers can be out $200k-$500k in diligence, legal, and financing arrangement costs. Neither side recovers from the other.

How to read an LOI in 30 minutes

Page 1: the headline price. Look for the dollar amount (or formula) and the form of consideration. Is it $10M cash? $10M with $3M in earnout? $10M with rollover equity? The headline price means very different things depending on the breakdown. Don’t accept ‘$10M’ without understanding what 100% of that price actually looks like at close.

Page 2-3: deal structure and key conditions. Asset sale or stock sale. Working capital target. Conditions to close (financing, regulatory approval, third-party consents). Each of these affects your tax bill, your post-close obligations, and your risk of the deal not closing. Read every condition carefully.

Page 4-6: diligence scope and exclusivity. Diligence scope tells you what the buyer is going to investigate (financial, legal, operational, IT, environmental). Exclusivity tells you how long you’re locked up. Look for the exclusivity expiration date, automatic termination triggers, and any extension provisions. Push back if exclusivity is over 90 days.

Page 7-8: binding clauses and signature page. The last 1-2 pages typically contain the binding clauses (exclusivity, confidentiality, expense allocation, break fees if any, governing law, dispute resolution). These are the clauses with legal force. Read them word by word. If anything is unclear, ask your advisor or M&A attorney to translate before you sign.

Conclusion

An LOI is short for ‘Letter of Intent’ — the document that turns a buyer’s interest into a structured 60-120 day path to close. Most of the LOI is non-binding. Price, structure, working capital, earnout: all proposals subject to diligence. But two clauses are binding the moment you sign: exclusivity (you can’t shop the deal) and confidentiality (both parties keep terms private). Signing an LOI is a meaningful commitment. It locks you into one buyer for 2-4 months. It takes the business off the market. It exposes you to the buyer’s diligence team and gives them leverage to retrade the price. Read the LOI carefully. Negotiate the exclusivity period. Insert automatic termination triggers. And before you sign, make sure you understand exactly what is binding and what isn’t.

Frequently Asked Questions

What does LOI stand for?

LOI stands for ‘Letter of Intent.’ It’s the document a buyer presents to a seller to formalize the proposed terms of an acquisition before lawyers draft the binding purchase agreement. Typically 4-8 pages.

Is an LOI legally binding?

Most of the LOI is non-binding. Price, deal structure, earnout terms, working capital target — all proposals subject to diligence. Two clauses are typically binding: exclusivity (no-shop) and confidentiality. Read the LOI carefully to identify which sections are labeled ‘binding.’

How long is a typical LOI?

4-8 pages. Some are shorter (2-3 pages, more like term sheets). Some are longer (10-15 pages, when buyers include detailed diligence requirements or representations). The lower-middle-market standard is 5-7 pages.

When is an LOI signed in a business sale?

Roughly halfway through the sale process. After the seller has marketed the business, received indications of interest from multiple buyers, held management meetings, and selected a winning bidder. Usually 30-60 days after the seller engages an advisor.

What happens after I sign an LOI?

Diligence kicks off. The buyer’s financial DD, legal DD, and operational DD teams get access to the data room. Quality of Earnings work begins. Lawyers start drafting the Definitive Purchase Agreement. Total timeline from LOI to close: 60-120 days.

Can I back out of an LOI?

Usually yes, on commercial terms. If diligence reveals issues, if the buyer retrades the price, or if your circumstances change, you can typically walk away — but you’ll be bound by exclusivity (no other buyers during the period) and confidentiality. Check whether your LOI has a break fee.

What’s the difference between an LOI and a term sheet?

In M&A, ‘LOI’ is the standard term and is usually 4-8 pages with full deal structure. ‘Term sheet’ is shorter (1-3 pages) and more common in VC and early-stage indication-of-interest contexts. They often describe the same thing but the M&A industry uses ‘LOI.’

What’s the difference between an LOI and an MOU?

An MOU (Memorandum of Understanding) is typically used for partnerships, joint ventures, and strategic alliances — not acquisitions. In a business sale, the document is almost always called an LOI. If someone uses ‘MOU’ in an acquisition context, ask your advisor to clarify the intent.

How long is the exclusivity period in an LOI?

60-120 days, with 90 days being most common. Sellers should push for the shortest possible exclusivity (45-75 days) and insist on automatic termination triggers if the buyer misses milestones (financing letter by Day 30, draft DPA by Day 45).

What is ‘retrading’ an LOI?

Retrading is when the buyer lowers the price (or worsens the terms) during diligence after winning exclusivity. Common excuses: customer concentration, weaker-than-claimed Adjusted EBITDA, working capital surprises. Once the seller is locked into exclusivity, they have limited leverage to refuse the retrade.

Should I sign an LOI without a lawyer?

No. Even though most of the LOI is non-binding, the binding clauses (exclusivity, confidentiality, expense allocation) have real legal force. Have an M&A attorney review every LOI before signing. Cost: typically $2,000-$5,000 for an LOI review. Worth every dollar.

What percentage of signed LOIs actually close?

Roughly 70-80% in the lower-middle market. The 20-30% that break do so because of diligence findings (customer concentration, owner dependency), buyer financing problems, market changes, or loss of seller confidence. The earlier you address potential diligence issues, the higher your close rate.

About the Author

Christoph Totter is the founder of CT Acquisitions, a buy-side deal origination firm headquartered in Sheridan, Wyoming. CT Acquisitions sources founder-led businesses for 75+ private equity firms, family offices, and search funds across the U.S. lower middle market ($1M–$25M EBITDA). Christoph writes about M&A from the perspective of someone on the phone with both sides of the deal table every week. Connect on LinkedIn · Get in touch