Letter of intent
A mostly non-binding document setting out the proposed price, structure, and process, whose binding provisions typically cover exclusivity and confidentiality.
Also called: LOI · Term sheet · Heads of terms
The LOI is the hinge of a transaction. Before it, the seller has leverage and optionality; after it, the seller is usually locked into one buyer for a defined period while that buyer conducts diligence. The economic terms are described as non-binding, but in practice the LOI sets the anchor that every later negotiation moves away from — and it almost always moves in the buyer's direction.
That makes the detail worth fighting for at LOI stage rather than later. Purchase price and the earnings base it is calculated on. The structure: how much is cash at close, how much is deferred, and on what terms. Working capital treatment. The escrow and indemnity outline. Employment or consulting arrangements. Conditions to closing, including financing. And the timetable.
The binding sections deserve their own read. Exclusivity — often thirty to ninety days — stops the seller talking to anyone else, so its length and its termination triggers matter. Confidentiality, expense allocation, and governing law are typically binding too. A seller who negotiates a shorter exclusivity period with clear break conditions retains far more leverage if diligence starts producing surprises.
Where sellers get caught
- Signing a long exclusivity period with no milestones, which lets a slow buyer run the clock while your alternatives cool.
- Leaving working capital and debt-like items "to be agreed" — those become re-trade levers.
- Treating the LOI as a formality because the economics are non-binding. The anchor it sets is very real.
Common questions
Is an LOI legally binding?
Partly. The commercial terms are usually expressed as non-binding, while exclusivity, confidentiality, and expense provisions usually are binding. Which sections bind should be stated explicitly in the document.
Should I use a lawyer for an LOI?
Yes. It is the cheapest legal money in the whole process, because the terms it anchors are far harder to move afterwards.
Related terms
Exclusivity
A binding commitment in the LOI that the seller will not negotiate with other buyers for a defined period.
Due diligence
The buyer's post-LOI investigation of the business, covering financial, legal, commercial, tax, and operational matters.
Working capital peg
The agreed level of net working capital the business must have at closing, with any shortfall or excess settled in cash afterwards.
Cash-free debt-free
A pricing convention where the seller keeps the cash and clears the debt at closing, and the agreed enterprise value assumes neither is present.
Guides that use this term
Where letter of intent comes up in a real sale, and what it changes.
Last reviewed 2026-08-25. General information for business owners, not legal, tax, or financial advice — terms, thresholds, and tax treatment vary by jurisdiction and by deal.