Key Takeaways
- An LOI, or Letter of Intent, outlines the principal terms under which a buyer proposes to acquire or invest in a business.
- An LOI is not the same as a completed sale. Most acquisition terms are typically non-binding at this stage, although provisions such as exclusivity and confidentiality may be binding depending on the document.
- The headline purchase price is only part of the equation. Cash at closing, rollover equity, earnouts, financing, working capital, and other terms can materially affect the economics of a transaction.
- Signing an LOI usually begins a more intensive phase of the M&A process, including due diligence and negotiation of definitive transaction documents.
- Business owners should understand the entire proposed transaction—not simply the valuation—before signing an LOI.
After months or even years of building a successful company, receiving an offer from a potential buyer can be an exciting moment.
Then the buyer says:
“We’d like to send you an LOI.”
For owners who have never been through an M&A transaction, this can raise an immediate question: What exactly is an LOI?
LOI stands for Letter of Intent. In an acquisition, it is a document that outlines the principal terms under which a buyer proposes to acquire or invest in a business. It is an important milestone because it moves the conversation from general interest toward a more clearly defined potential transaction.
But an LOI is not a closing document, and signing one does not necessarily mean the business has been sold.
There may still be extensive due diligence, financing, legal negotiations, and other work ahead before a transaction closes.
For a business owner, understanding what an LOI says—and what it does not say—is critical. The purchase price may receive most of the attention, but some of the most important aspects of a proposed transaction can be found elsewhere in the document.
What Does LOI Mean in M&A?
A Letter of Intent establishes a preliminary framework for a potential acquisition.
Before a buyer commits substantial time, money, and resources to comprehensive due diligence, both sides generally want to know that they are aligned on the major economic and structural components of the transaction.
The LOI helps establish that framework.
Depending on the transaction, it may address the proposed valuation, transaction structure, cash consideration, rollover equity, earnouts, seller financing, working capital expectations, financing conditions, owner involvement after closing, confidentiality, exclusivity, due diligence, and the anticipated transaction timeline.
The amount of detail can vary significantly.
Some LOIs are relatively concise and establish only the major terms. Others address numerous economic and structural issues before the parties move forward.
From a buyer’s perspective, the goal is generally to establish enough alignment that both sides are comfortable investing additional resources in pursuing the transaction.
From an owner’s perspective, the LOI provides an opportunity to understand what the buyer is actually proposing before entering the most intensive stages of the M&A process.
Is an LOI a Binding Agreement?
This is one of the most important distinctions for business owners to understand.
The Acquisition Itself Is Often Non-Binding at the LOI Stage
In many M&A transactions, the LOI is structured so that the proposed acquisition terms are largely non-binding.
That generally means signing the LOI itself does not necessarily require the buyer to purchase the business or the seller to complete the sale.
The buyer still needs to conduct due diligence, and both parties typically must negotiate and execute definitive transaction agreements before the acquisition can be completed.
That distinction is important because circumstances can change between signing an LOI and closing.
Certain Provisions May Still Be Binding
An LOI should never be dismissed as “just a non-binding document.”
Certain provisions may be specifically drafted to create binding obligations.
These can include provisions addressing confidentiality, exclusivity, expenses, access to information, governing law, or other process-related matters.
The exact legal effect depends on the wording of the LOI and applicable law.
For that reason, business owners should have qualified M&A legal counsel review an LOI before signing it.
Purchase Price Is Only the Beginning
One of the easiest mistakes an owner can make is focusing entirely on the number at the top of the offer.
Suppose a buyer proposes a $10 million valuation.
The natural reaction is to think:
“They’re offering me $10 million for my company.”
But that doesn’t necessarily mean the owner will receive $10 million in cash at closing.
The structure behind the headline number matters.
Two buyers can propose the same headline valuation while offering significantly different economics.
Cash at Closing
How much of the proposed consideration will actually be paid in cash when the transaction closes?
For an owner seeking liquidity, this can be just as important as the total stated purchase price.
Rollover Equity
Some partnership transactions require or invite the owner to retain an equity interest in the business after closing.
Rather than receiving the entire value in cash, the owner may “roll over” part of their equity into the new ownership structure.
This can provide an opportunity to participate in future value creation, but it also means a portion of the owner’s wealth remains invested and at risk.
Earnouts
An earnout makes a portion of the consideration contingent on the business achieving specified future performance objectives or milestones.
That means part of the potential purchase price may not be guaranteed at closing.
Owners should understand exactly how an earnout works, how performance will be measured, and what conditions determine whether the additional consideration is ultimately paid.
Seller Financing
In some transactions, the seller may effectively finance a portion of the acquisition by accepting payment over time rather than receiving all consideration at closing.
Again, this changes the economics and risk profile of the offer.
Working Capital and Other Adjustments
The final amount paid to the seller can also be affected by working capital requirements, debt, cash, transaction expenses, and other purchase price adjustments.
This is why evaluating an LOI requires looking beyond the headline valuation.
The structure of the offer can be just as important as the number itself.
Why Do Buyers Use LOIs?
From the buy-side perspective, conducting an acquisition requires a significant investment of resources.
A sophisticated buyer may involve financial professionals, attorneys, accountants, lenders, consultants, operating executives, and other specialists during due diligence.
Before committing those resources, the buyer generally wants confidence that both sides have reached preliminary alignment on the major terms of the transaction.
The LOI helps establish that alignment.
It can clarify valuation expectations, transaction structure, financing assumptions, rollover equity, timing, management expectations, and other important considerations before the buyer moves deeper into diligence.
A well-constructed LOI can also reveal disagreements early.
If the owner wants a complete exit but the buyer expects substantial rollover equity and continued involvement, for example, identifying that difference before due diligence can save both parties considerable time.
The purpose isn’t to resolve every issue.
It’s to establish a sufficiently clear roadmap for determining whether the transaction is worth pursuing.
What Does Exclusivity Mean in an LOI?
Exclusivity is one provision business owners should pay particularly close attention to.
An exclusivity provision, sometimes called a no-shop provision, generally limits the seller’s ability to solicit, pursue, or negotiate competing transactions for an agreed period.
Why would a buyer request that?
Once an LOI is signed, the buyer may begin spending significant resources investigating the business.
That can include financial diligence, legal review, a Quality of Earnings analysis, financing work, tax analysis, operational diligence, and preparation of transaction documents.
The buyer generally does not want to make that investment while the seller simultaneously negotiates a sale to someone else.
For the owner, however, agreeing to exclusivity is significant because it can temporarily restrict the ability to pursue alternative buyers.
The duration and specific terms of exclusivity therefore deserve careful consideration before the LOI is signed.
What Happens After You Sign an LOI?
Signing an LOI is a major milestone, but substantial work typically remains before closing.
Due Diligence
The buyer will usually begin or expand its review of the company.
Depending on the business and transaction, diligence may examine financial performance, customer relationships, contracts, employees, taxes, legal matters, technology, intellectual property, operations, insurance, regulatory compliance, and other areas.
The objective is to verify the buyer’s assumptions and identify risks that could affect the acquisition.
Quality of Earnings
In many lower middle-market transactions, buyers may commission a Quality of Earnings, or QoE, analysis.
A QoE analysis can help evaluate the sustainability of historical earnings and examine items such as normalized EBITDA and proposed add-backs.
For owners, this is one reason accurate financial reporting and well-supported adjustments are so important before entering an M&A process.
Financing and Internal Approval
Depending on the buyer, additional approvals may also be required.
A private equity firm may need final investment committee approval. A strategic buyer may have its own internal authorization process. If acquisition financing is involved, lenders may conduct additional diligence and impose their own requirements.
Definitive Transaction Documents
While diligence is underway, legal teams typically negotiate the definitive agreements that will govern the transaction.
These documents are considerably more detailed than the LOI and address the legal rights, obligations, representations, warranties, covenants, closing conditions, and other provisions necessary to complete the acquisition.
Closing
Once due diligence has been completed, definitive documents are finalized, financing is available, and the applicable closing conditions are satisfied, the parties can proceed toward closing.
Only then does the proposed transaction become a completed acquisition.
Can the Deal Change After the LOI Is Signed?
Yes.
Because the buyer generally has not completed full due diligence when the LOI is signed, new information discovered afterward can affect the proposed transaction.
For example, the buyer may discover that normalized EBITDA is lower than initially represented, a major customer relationship is at risk, customer concentration is higher than expected, working capital needs differ from initial assumptions, or certain EBITDA add-backs cannot be adequately supported.
Business performance itself can also change during the transaction.
If those discoveries materially alter the buyer’s understanding of the company, the buyer may seek to modify the valuation, structure, or other terms.
That doesn’t mean every change after an LOI is appropriate. Experienced buyers should enter the process with thoughtful assumptions and conduct themselves consistently with the framework they’ve proposed.
But owners should understand that an LOI is generally based on the information available at that point in the process.
The stronger and more transparent that information is before the LOI, the lower the likelihood that major surprises emerge later.
What Should a Business Owner Evaluate Before Signing an LOI?
The first question shouldn’t simply be:
Instead, an owner should understand the entire proposed transaction.
How much cash will be received at closing? Is rollover equity required? Is any consideration contingent on future performance? Does the buyer require financing? What level of involvement will the owner have after closing? How long will exclusivity last? What assumptions support the valuation? What does the due diligence process involve? What circumstances could cause the proposed economics to change?
These details can materially affect whether an offer actually aligns with the owner’s objectives.
For example, an owner preparing for immediate retirement may view an offer with substantial rollover equity and a multi-year operating commitment very differently from an owner who wants to continue growing the business with a new partner.
The highest headline valuation isn’t automatically the best transaction.
The complete structure matters.
An LOI Is a Major Milestone—Not the Finish Line
Receiving an LOI should be viewed as an important step forward.
It indicates that a buyer has moved beyond casual interest and is willing to put a proposed transaction framework in writing.
But it isn’t the finish line.
An LOI is better understood as the point where the parties establish enough alignment to begin answering the deeper questions necessary to complete an acquisition.
From there, the focus moves toward validating financial performance, understanding risk, finalizing transaction structure, negotiating definitive documents, and determining whether both parties remain comfortable moving toward closing.
Business owners who understand that distinction are better prepared for what comes next.
Conclusion
An LOI can be one of the most exciting documents a business owner receives during an M&A process, but it should also be evaluated carefully.
The purchase price matters—but so do the structure, cash at closing, rollover equity, earnouts, working capital expectations, exclusivity, financing, post-closing involvement, and other terms surrounding the offer.
From a buyer’s perspective, the LOI establishes a framework for investing significant resources into evaluating and completing a potential acquisition.
For the business owner, it provides an opportunity to understand exactly what that buyer is proposing before moving deeper into the process.
The strongest LOI isn’t necessarily the one displaying the largest number.
It’s the one whose economics, structure, expectations, and path toward closing align with what the owner ultimately wants to accomplish.
Understanding those details before signing can make the road from LOI to closing considerably clearer.
Frequently Asked Questions
1. What does LOI stand for in M&A?
LOI stands for Letter of Intent. It outlines the principal proposed terms under which a buyer intends to acquire or invest in a business before the parties negotiate and execute definitive transaction documents.
2. Is an LOI legally binding?
The proposed acquisition terms in an LOI are commonly structured as non-binding, but certain provisions—such as confidentiality or exclusivity—may be binding. The specific language of the document matters, so owners should seek qualified legal counsel before signing.
3. What happens after an LOI is signed?
The transaction generally moves into comprehensive due diligence, which may include financial, legal, operational, tax, commercial, and other reviews. The parties also work toward negotiating definitive transaction documents and satisfying financing or approval requirements.
4. Can the purchase price change after an LOI is signed?
Potentially. Information discovered during due diligence, changes in financial performance, unsupported EBITDA adjustments, working capital requirements, or other material findings can affect the final transaction economics.
5. Does signing an LOI mean my business is sold?
No. Signing an LOI is an important transaction milestone, but significant work typically remains before closing. The acquisition generally isn’t completed until due diligence is satisfied, definitive agreements are executed, applicable conditions are met, and the transaction closes.
