Most sellers sign a letter of intent believing they've agreed to nothing binding. Most buyers sign believing they've locked in a deal. Both are partially wrong — and the gap between those two perceptions is where deals collapse, relationships sour, and litigation sometimes begins.

The letter of intent (LOI) — also called a term sheet, memorandum of understanding, or heads of agreement — is the document that defines the basic economic and structural terms of an acquisition before the parties invest in full documentation and due diligence. Understanding precisely what an LOI does and doesn't commit you to is not optional. It is the foundation of every deal.

The Binding vs. Non-Binding Distinction

Most LOI provisions are expressly non-binding — the purchase price, representations and warranties, indemnification framework, and conditions to closing are typically stated to be non-binding and subject to execution of a definitive agreement. This means either party can walk away from those terms without legal consequence (though not without reputational consequence).

But certain LOI provisions are almost always binding:

  • Exclusivity / no-shop: The seller agrees not to solicit, entertain, or enter into discussions with other potential buyers for a defined period — typically 45 to 90 days. This is the most important binding provision for the buyer. It prevents the seller from using the signed LOI as leverage to run a parallel process.
  • Confidentiality: Either incorporated by reference to a separate NDA or included directly, confidentiality obligations are binding and survive any failure to close.
  • Expense allocation: Each party bears its own transaction costs unless otherwise specified. Some LOIs include break-up fees or expense reimbursement provisions if the deal fails for defined reasons.
  • Governing law and jurisdiction: The choice of law governing the LOI itself (and often the contemplated definitive agreement) is binding.

The Exclusivity Clause: Why Sellers Should Read It Carefully

Sellers routinely underestimate how much they are giving up when they sign an exclusivity provision. During the exclusivity period, the seller is legally prohibited from discussing the business with other potential acquirers. If the buyer uses the period to conduct diligence, re-trade the price, and delay closing, the seller has limited options — they can terminate the LOI, but they've lost weeks or months and may have damaged relationships with other parties who went away during the process.

Sellers should negotiate exclusivity carefully: limit the period to the minimum necessary for the buyer to complete diligence, include a buyer-side obligation to proceed in good faith and on a defined timeline, and ensure the exclusivity terminates automatically if the buyer fails to deliver a definitive agreement draft within a specified period. Sellers should also resist extending exclusivity without a meaningful concession from the buyer.

What the LOI Should Cover: The Economic Framework

A well-drafted LOI resolves as much economic ambiguity as possible before the parties enter full documentation. The key items:

  • Purchase price and structure: Is this a stock deal or asset deal? What is the headline price, and how is it calculated? Is there a working capital adjustment (closing date mechanism) or a locked-box mechanism (fixed price based on a historical balance sheet date)? Working capital adjustments are more common in U.S. middle-market deals; locked-box is more common in European transactions.
  • Rollover equity: Is management expected to reinvest a portion of their proceeds in the acquiring entity? If so, what percentage, at what valuation, and with what rights?
  • Earn-out: If part of the purchase price is contingent on post-closing performance, the LOI should describe the metric, the measurement period, and the payment formula. Earn-outs that are vague at LOI stage become contentious disputes at closing and after.
  • Escrow or holdback: Typically 10–15% of the purchase price is held in escrow for 12–18 months to cover indemnification claims. The LOI should set the amount and duration.
  • Conditions to closing: Any material conditions — financing contingency, regulatory approvals, key employee retention — should be surfaced in the LOI.

Common Seller Traps

Agreeing to price before understanding the adjustment mechanism. A $10 million purchase price with a working capital adjustment can become $8.5 million at closing if the adjustment methodology is unfavorable and the seller didn't understand it at LOI stage. The headline number in the LOI is not necessarily the number on the closing statement.

Signing broad exclusivity before adequate price clarity. Some buyers deliberately keep the LOI vague about price to preserve optionality during diligence. A seller who locks in exclusivity based on a vague price range has given up their leverage before the real negotiation has begun.

Ignoring the indemnification framework. Sellers who defer all indemnification discussion to the definitive agreement often find themselves negotiating the most consequential terms under time pressure, after exclusivity has already been granted. The LOI should at least address the cap on indemnification liability and the survival period for representations.

Common Buyer Traps

Overly specific LOIs that limit diligence flexibility. Buyers who commit to precise price adjustments or indemnification terms in the LOI before completing diligence may find they've created implied obligations that constrain them when diligence reveals problems. There is a tension between the seller's desire for specificity and the buyer's need for flexibility — buyers should be specific enough to demonstrate seriousness but preserve room to adjust for material diligence findings.

No material adverse change provision. If the business deteriorates materially between LOI signing and closing, a buyer without a MAC clause has limited ability to walk away or reprice. This provision belongs in the definitive agreement but should be flagged in the LOI.

Inadequate treatment of key employees. If the business depends on specific individuals, the LOI should address whether their continued employment is a closing condition and what retention arrangements are contemplated. Discovering post-LOI that key employees plan to leave is a deal-altering problem that could have been surfaced earlier.

The Legal Effect of "Non-Binding"

Courts in some jurisdictions have found that parties to a "non-binding" LOI nonetheless owe each other duties of good faith and fair dealing in negotiation — particularly when one party has invested significantly in reliance on the LOI. While Florida courts generally enforce the non-binding characterization of LOI terms, parties should not assume that signing a non-binding LOI creates a license to negotiate in bad faith. Abrupt termination of LOI negotiations without legitimate justification, particularly after the other party has incurred substantial costs, can expose a party to promissory estoppel or bad faith claims in some jurisdictions.

When to Engage Counsel

The most common mistake in M&A is engaging counsel after the LOI is signed. By that point, the key economic terms — price, structure, exclusivity, escrow — are already set. Negotiating them back out of a signed LOI is difficult and often damages the relationship.

Counsel at LOI stage allows for real-time issue spotting: identifying provisions that seem minor but have significant legal consequences, ensuring the exclusivity period is balanced, and making sure the LOI accurately reflects what the parties actually agreed to — rather than what one party's form document says they agreed to.