A letter of intent for the acquisition of a company is one of the key documents in the mergers and acquisitions (M&A) process. It outlines the buyer’s intentions, key deal terms, and expectations before moving into due diligence and final negotiations. While usually not legally binding, this document plays a big role in reducing misunderstandings and aligning both parties early in the proceedings. Confusion leads to delays, disputes, or failed deals.
This article explains a letter of intent, when it’s used, and why it matters. You’ll also find a detailed letter of intent for acquisition template that can be adapted to different deal types and goals.
What is a letter of intent for acquisition?
A letter of intent for M&A (LOI) is a document that outlines the initial terms under which a buyer intends to acquire a business or its assets. It represents a key milestone in the deal process, signaling the buyer’s serious interest and the willingness of both parties to move forward with negotiations.
Although it’s usually not legally binding, the LOI plays an important role in aligning expectations early in the deal. It provides a clear negotiation framework and sets the stage for the due diligence process and the development of the final purchase agreement.
In many deals, the LOI is followed by an M&A term sheet, which offers more detailed, structured terms before drafting the final agreement.
Purpose of a letter of intent
The LOI serves several important purposes in the M&A process, including the following:
- Clarifies key transaction terms
The LOI outlines the major terms of the proposed deal, such as purchase price, structure (asset purchase or stock purchase), and payment terms.
- Initiates due diligence
A signed LOI often kicks off the due diligence phase, allowing the buyer access to sensitive documents and business records.
- Demonstrates commitment
While not always legally binding, it shows serious intent from the buyer.
- Prevents distractions
It may include an exclusivity provision, preventing the seller from negotiating with other potential buyers during the exclusivity period.
- Lays the groundwork
It helps both sides begin the merger negotiation process and build toward the final agreement.
When is an LOI used in the M&A process?
An LOI is used in the M&A process after the buyer completes initial due diligence but before signing the final agreement. By this point, the buyer has gathered enough basic information to propose a purchase price and deal structure, although detailed due diligence is still to come.
Let’s explore the M&A timeline in more detail to see exactly where the LOI fits.
- Initial interest and introductions. This begins conversations and establishes goal alignment between buyer and seller.
- A confidentiality agreement signing. Ensures the protection of sensitive information.
- Preliminary review of the seller’s business. The LOI initiates a high-level overview of the company’s assets and operations.
- The LOI is submitted and negotiated. The M&A process timeline originates when the buyer sends a letter of intent for business acquisition outlining principal terms.
- Due diligence process. This procedure is an in-depth examination of financial records, legal documents, intellectual property, etc. It may also involve interviews with key employees.
- Final negotiations and drafting of legal documents. This is when major terms are finalized and a detailed purchase agreement is created.
- A definitive purchase agreement signing. A legally binding agreement is signed.
- Transfer of the acquired business. The legal transfer of ownership occurs.
Do you need help organizing your internal team before entering a deal? Check out our guide on building an effective M&A team to facilitate a smoother transaction process.
Key components and structure of the LOI for business acquisition
A well-drafted LOI should include the following sections:
| Section | Description |
|---|---|
| Introduction |
|
| Structure of the deal |
|
| Purchase price and payment terms |
|
| Assumed liabilities |
|
| Pre-closing covenants |
|
| Due diligence |
|
| Exclusivity |
|
| Confidentiality |
|
| Binding and non-binding terms |
|
| Closing conditions |
|
| Governing law |
|
Are you looking to delve deeper into LOI structure and components? Explore our articles on crafting a successful business acquisition plan, choosing the right M&A firms, and aligning your pre-merger strategy for long-term value.
How to draft a letter of intent for acquisition
Drafting an LOI requires thoughtful preparation and legal awareness. Here are some practical steps:
- Start with a clear outline. Define the principal terms you want to include — purchase price, deal structure, and key dates.
- Use clear language. Avoid overly complex terms unless necessary. Clear communication helps avoid confusion.
- Define what is binding. Be explicit about which parts of the LOI are legally binding — and which are not. Typically, confidentiality and exclusivity are binding provisions.
- Tailor to the deal size. For smaller transactions, a shorter LOI may suffice. Larger deals often require more detail.
- Include a timeline. Set deadlines for beginning due diligence, submitting the detailed purchase agreement, and aiming for the final closing.
- Seek legal input. Even a non-binding LOI should be reviewed by legal counsel to mitigate risk.
LOI template example
This LOI template can be tailored for various deal types. Key terms such as structure, payment terms, and due diligence scope should be adjusted to reflect the deal specifics. Buyers may choose to include conditions or more detailed review rights, while sellers might refine exclusivity periods or request deposits.
Letter of Intent
Business Acquisition
Date: [Insert Date]
Parties:
- Buyer: [Insert Buyer’s Name]
- Seller: [Insert Seller’s Name]
1. Introduction
This Letter of Intent (“LOI”) outlines the preliminary understanding between [Buyer’s Name] (“Buyer”) and [Seller’s Name] (“Seller”) regarding the potential acquisition of [target company name or description]. This LOI is intended to serve as a basis for further negotiations and the execution of a definitive agreement.
2. Purpose of the LOI
The purpose of this LOI is to establish the fundamental terms of the proposed transaction, outline the process of due diligence, and set forth key conditions under which the Buyer and Seller agree to proceed with further discussions and actions toward completing the transaction.
3. Structure of the Deal
- Type of Transaction: [asset sale/stock sale]
- Identification of Assets or Shares: [Provide a brief description of the assets or shares being acquired, such as specific business assets, intellectual property, shares of stock, etc.]
4. Purchase Price and Payment Terms
- Proposed Price: [$Amount]
- Payment Breakdown: [Indicate whether the payment will be made in cash, stock, or a combination, and any seller notes.]
- Working Capital Adjustments (if applicable): [Details regarding any working capital adjustments or current assets to be considered in the transaction]
5. Assumed Liabilities
The Buyer will assume the following liabilities as part of the transaction: [list assumed liabilities, if applicable].
6. Pre-Closing Covenants
The Buyer and Seller agree to adhere to the following covenants before closing:
- [List of specific actions the parties must take before closing, such as maintaining business operations and securing regulatory approvals.]
7. Due Diligence
The Buyer will have access to financial records, business records, intellectual property, and any other relevant information required to complete due diligence. The due diligence process is expected to take [insert number] days and will begin upon the execution of this LOI.
8. Exclusivity
- Exclusivity Period: The Seller agrees to negotiate with the Buyer exclusively for [insert duration of exclusivity period, e.g., 30 days] from the date of this LOI.
- Terms of Exclusivity: During this period, the Seller shall not enter into negotiations or agreements with any other parties regarding the sale of the business or its assets.
9. Confidentiality
This LOI reaffirms the terms of the existing confidentiality agreement, and both parties agree to maintain the confidentiality of sensitive information exchanged during the due diligence phase. All such information will be used solely for the purpose of evaluating the potential transaction.
10. Binding and Non-Binding Terms
- Binding Terms: The following provisions are legally binding:
- Confidentiality
- Exclusivity
- Break-up fees (if applicable)
- Responsibility for expenses
- Confidentiality
- Non-Binding Terms: All other terms in this LOI are non-binding and represent the intent of the parties to proceed toward a definitive agreement.
11. Closing Conditions
- Key Conditions to Closing: The closing of the transaction is subject to [list key conditions such as regulatory approvals and financing].
- Target Closing Date: The parties aim to close the transaction by [insert target date].
12. Governing Law
This LOI and any potential transaction will be governed by and construed under the laws of [insert jurisdiction].
Signatures:
Key takeaways
- A LOI for M&A outlines the preliminary terms and intentions of the buyer before formal negotiations begin.
- A well-structured LOI helps align both parties’ expectations and minimizes potential misunderstandings.
- While usually not legally binding, an LOI serves as the foundation for due diligence and the final purchase agreement.
- The LOI may include provisions like exclusivity, confidentiality, and clear purchase price breakdowns.
- A LOI often marks the transition from initial discussions to a more detailed, structured negotiation phase.
- Key sections in an LOI include deal structure, purchase price, due diligence procedures, and closing conditions.
- Legal input is crucial when drafting an LOI for M&A to ensure clarity on legally binding and non-binding terms.
