How To Write A Letter Of Intent

Writing a letter of intent without wasting everyone's time

The letter of intent is a one- to three-page document that states the basic terms of a proposed transaction before the detailed work begins. It is used in acquisitions, partnerships, commercial leases, and joint ventures. Most of the time it is mostly non-binding, which creates confusion if you do not say that clearly on page one. I recently drafted an LOI for a small business acquisition where both parties had already been talking through a phone call. The business was straightforward — purchase of inventory, assumption of a lease, some equipment — but the seller wanted an immediate exclusivity period while the buyer needed time to review financials. We structured the LOI to give the buyer fourteen days of exclusivity, with the condition that the buyer had to deliver a due diligence checklist within seven days or the exclusivity lapsed automatically. That pushed worked because it prevented the seller from being tied up indefinitely while the buyer stalled. Without that deadline, the seller could have ended up weeks down the line with no progress and no way to entertain other offers. There is a standard sequence people follow, though it is not written anywhere as a rule. First you identify the parties with their full legal names and addresses. Second you describe the structure of the transaction — is this a stock purchase, an asset purchase, a merger, a lease? Third you lay out the core commercial terms with actual numbers. Fourth you separate the binding clauses from the non-binding ones. Fifth you include a timeline and the conditions that must be satisfied before anything becomes final.

How To Write A Letter Of Intent

The practical version goes like this. Open with a single sentence that identifies what the LOI is and what it is not. Something like: this letter sets forth the principal terms under which the parties propose to enter into a definitive agreement. It is not intended to be legally binding except for the provisions explicitly marked as such. That line alone will save you from half the misunderstandings that come up later. Then state the transaction structure. Be specific. "Buyer agrees to purchase 100% of the issued and outstanding shares of Target Corp., free and clear of all liens, encumbrances, and security interests" tells you far more than "Buyer will acquire Target." Every word in an LOI matters because the definitive agreement will be drafted against the language you put here. If you are vague now, your lawyer will spend hours clarifying it later. Next come the key commercial terms. Price, payment structure, any earn-out provisions, working capital adjustments, closing conditions. If the purchase price is $2 million payable at closing with a $200,000 holdback for indemnification claims, write it exactly like that. Do not write "price to be negotiated." That is not a term. That is an excuse to delay.

After the commercial terms you list the binding provisions. These typically include confidentiality, exclusivity, governing law, and expense allocation. The confidentiality clause should survive the termination of the LOI — usually for two to three years. The exclusivity clause, sometimes called a no-shop provision, gives the buyer a window during which the seller cannot entertain other offers. I have seen this clause blow up deals when it was too long or had no exit mechanism. Set it to thirty to sixty days with a trigger for extension, such as satisfactory completion of due diligence. Without a trigger, the seller gets stuck and the buyer gains nothing. The non-binding provisions come next. These are the aspirational parts — the intent to negotiate in good faith, the agreement to prepare a definitive agreement, the general description of the deal. Make it obvious which sections are binding and which are not. Use headings like "Binding Provisions" and "Non-Binding Provisions." Do not rely on a single disclaimer sentence at the end of the document to handle this. Courts have ruled against parties who buried the binding/non-binding distinction in fine print. Closing conditions and timeline go after that. What needs to happen before the deal closes? Regulatory approval, third-party consents, financing commitment, satisfactory due diligence. Set realistic deadlines for each. An LOI without a timeline is just a conversation that got written down.

One detail that people consistently mess up is the representation of authority. Every party signing the LOI should confirm they have the authority to bind their organization. If you are signing on behalf of a corporation, include a line like "The undersigned represents that they have full authority to execute this letter on behalf of [Party Name]." Otherwise the other side can later claim the person who signed had no power to commit anyone to anything. For the format, keep it to two or three pages maximum. Attach schedules only if absolutely necessary. Most LOIs should stand on their own. If you find yourself adding a fourth page, cut something else out rather than pad it with filler. A complete LOI for a typical small business acquisition usually takes about two hours to draft from scratch if you have a solid template and know the basic terms. If you are working blind with no template and unclear terms, it can stretch to four or five hours. A good template with the structure already in place reduces that to under an hour for a straightforward deal.

The main weakness of a letter of intent is that it can create a false sense of security. Parties often treat the signed LOI as the deal and move on to other things without realizing that the binding provisions — especially exclusivity — may have already expired. I had a client who assumed an LOI was still live because neither side had terminated it in writing. The exclusivity period had ended eleven days earlier. By the time we caught it, the seller had already entered into a second LOI with another buyer. The workaround was to immediately send a written notice invoking the extension clause, which gave us another fourteen days. That extension clause had been in the original LOI but was written in a way that required affirmative action to activate. Most people miss that detail because they are focused on the commercial terms and skim past the mechanical provisions. Another limitation is that LOIs do not work well in highly speculative transactions. If the deal depends on obtaining a license that may or may not be granted, or on regulatory approval that is uncertain, the LOI becomes a liability rather than a tool. In those cases a simple memorandum of understanding with clearly stated contingencies is more appropriate. An LOI with a long exclusivity period in a high-uncertainty deal ties up both parties for no productive reason. The definition matters less than the function. A letter of intent is a preliminary agreement that frames the negotiation process. It is not the contract. It is the map. The definitive agreement is the territory. Treat it like a map and you will arrive somewhere useful.