You have been approached about an acquisition. The buyer sends over a letter of intent. It looks like a few pages of broad strokes, mostly non-binding, nothing to worry about yet.
That read is usually wrong. The LOI is the highest-leverage moment in an M&A process, and most founders give up more in it than they ever recover in the final agreement. This guide explains exactly what an LOI contains, which parts are actually binding, and what to push back on before you sign.
What is a letter of intent?
A letter of intent is a document that outlines the key terms of a proposed transaction before the full legal agreement is drafted. In a startup acquisition, the buyer sends the LOI to signal serious intent and lock in the headline terms: price, structure, and the conditions under which the deal will proceed.
It sits between an early conversation and a signed purchase agreement. By the time an LOI lands in your inbox, the buyer has done enough preliminary review to have a view on price. You have not yet opened the full data room or gone through formal due diligence.
LOI vs term sheet: what is the difference?
If you have raised venture capital, you are familiar with what a term sheet is. An LOI covers similar ground but for an acquisition rather than an investment. A term sheet in a fundraise sets out valuation, ownership, and governance. An LOI in an M&A deal sets out the purchase price, deal structure, and exclusivity. Both are mostly non-binding summaries of intent, and both become the foundation for the formal legal documents that follow.
The practical difference is that an LOI creates a tighter timeline. Once signed, the exclusivity clause typically stops you from talking to other buyers for 30 to 90 days. That clock is real.
What an acquisition LOI typically includes
Purchase price and structure
The LOI will state the total consideration and how it is structured. All cash at close is the simplest form. More common at the startup level is a mix of cash at close, an earnout tied to hitting revenue or product milestones after the acquisition, and equity in the acquiring company if it is private.
The headline number in an LOI is rarely the number you receive. Earnouts can be missed. Equity in the acquirer has its own risk. Push for as much of the consideration as possible in cash at close, and treat any earnout structure as something to negotiate carefully.
Exclusivity
This is the clause that matters most. Exclusivity prohibits you from soliciting, entertaining, or progressing conversations with any other potential buyer for a defined period, typically 30 to 90 days. During that window, the buyer will conduct due diligence, and you will be legally prevented from creating competitive pressure.
Exclusivity is almost always binding even when the rest of the LOI is not. Before you sign, negotiate the duration down as short as you can. If the buyer needs 60 days, ask why and push for 30. If they miss the deadline, you want to be released automatically with no extension required.
Representations and warranties
The LOI will note that the final agreement will include reps and warranties from the seller. These are legally binding statements about the company: that the financials are accurate, there are no undisclosed liabilities, the IP is clean, and so on. The LOI itself will not spell these out in detail, but they will be heavily negotiated in the purchase agreement.
Closing conditions
These are the conditions both parties must satisfy before the deal closes. Standard conditions include completion of due diligence to the buyer's satisfaction, board and shareholder approval, and any required regulatory clearances. If any condition is not met, the buyer can walk away.
Confidentiality
Most LOIs include a confidentiality clause covering the terms of the LOI itself and the acquisition discussions. This is typically binding. It means you cannot tell other investors, advisors, or potential acquirers that you are in a process without the buyer's consent.
Which parts are legally binding?
Most of the LOI is non-binding: price, structure, and the general intent to transact. The parts that are typically binding are exclusivity, confidentiality, and sometimes a break fee if the deal falls through for specific reasons. Courts have occasionally enforced other provisions where the language was specific enough, which is why having a lawyer review every clause before you sign is not optional.
The non-binding label on the rest of the document does not mean it has no effect. Once a price is on paper and both parties have negotiated around it, re-trading that number later is very difficult. The LOI anchors the deal.
What to negotiate before you sign
| What to negotiate | Why it matters | What to push for |
|---|
| Exclusivity period | Once signed, you cannot talk to other buyers | As short as possible, 30 days with no automatic extension |
| Earnout structure | Earnouts are frequently missed or disputed | Tie to metrics you control; push for shorter measurement windows |
| Break fee | Protects you if buyer walks away after exclusivity | Include a reverse break fee payable to you if buyer terminates |
| Definition of due diligence satisfactory to buyer | Vague language lets buyer exit for any reason | Define what constitutes satisfactory completion |
| Working capital peg | Affects how much cash stays in the business at close | Understand the baseline and negotiate the methodology upfront |
What happens after the LOI is signed
Once the LOI is signed, formal due diligence begins. The buyer will send a due diligence request list covering financials, legal documents, customer contracts, IP, and personnel. You will typically open a data room and grant controlled access. The process typically takes 30 to 90 days depending on company complexity.
Simultaneously, lawyers on both sides begin drafting the definitive purchase agreement. The LOI terms are the starting point, but every clause will be renegotiated in detail. Items that looked settled in the LOI frequently reopen.
If you are approaching this stage, it is worth reading what document acquirers request before an LOI so you know what to have ready before the process formally starts.
FAQ
Can you back out after signing an LOI?
The non-binding sections of an LOI can be walked away from by either party. However, breaking an exclusivity commitment or confidentiality obligation can expose you to legal liability. If you want to exit a process after signing, talk to your lawyer before making any move.
Does an LOI mean the deal is done?
No. LOIs fall through regularly. Due diligence uncovers issues, financing falls apart, the acquirer's board changes its mind, or the parties cannot agree on the definitive agreement terms. The LOI is a commitment to try to reach a deal, not a commitment to close one.
How long does due diligence take after an LOI?
For early-stage startups, 30 to 60 days is common. For companies with complex cap tables, revenue contracts, or IP issues, it can run longer. The exclusivity period is meant to cover this window, which is why keeping it as short as possible is in your interest.
Is an LOI the same as an offer to purchase?
An LOI precedes the formal purchase offer. It sets out the agreed intent and key economics. The definitive purchase agreement or asset purchase agreement is the binding legal document that follows. The LOI gives both parties enough comfort to invest in that full document.
