If you’re contemplating an M&A process – or know founders who have – you’ve likely come across the term LOI. You may even receive an unsolicited LOI from a buyer keen to entice you to engage, making it feel like a deal is within your immediate reach.
But what’s an LOI? And does signing an LOI mean that a deal is basically done?
An LOI – Letter of Intent – is a non‑binding offer: it outlines a buyer’s key terms and intentions, sets a timeline, and usually grants exclusivity to the buyer for due diligence. Once you sign, you can’t talk to other buyers until closing or exclusivity expires – The buyer, however, can still walk away at any point.
Signing an LOI is a milestone, not the finish line: the LOI‑to‑close conversion is generally in the 25–30% range, meaning that the majority of LOIs do not lead to a successful deal… Some deals fail for reasons outside anyone’s control (market shifts, unexpected issues), but most do because of poorly negotiated LOI terms.
💡Signing an LOI is a milestone, not the finish line: the LOI‑to‑close conversion is generally in the 25–30% range, meaning that the majority of LOIs do not lead to a successful deal… Some deals fail for reasons outside anyone’s control (market shifts, unexpected issues), but most do because of poorly negotiated LOI terms.
Even when both parties are genuinely motivated to get a deal done, things can still fall apart if expectations aren’t clearly set
In this article, we take a practical, legal‑lens look at what to expect—and what to lock down—before you sign.
Scope of the Transaction
The LOI should clearly outline what’s being sold—is it the entire company (shares) or just specific assets? This distinction matters and will impact everything from tax treatment to legal complexity.
If you’re only selling part of the business, make sure the carve‑out is clearly defined. What’s included? What’s excluded? Are you transferring liabilities or keeping them? Misalignment here is one of the most common sources of friction later in the process—so make sure the scope is crystal clear upfront.
It will also impact the type of sales agreement that you will need for your deal – see Asset vs Share sale: Which one is right for you for more on this.
Payment Terms
Unsurprisingly, this is one of the most critical sections in the LOI. It should outline the proposed purchase price, how it is calculated, how it will be paid, and when.
Deals can be all-cash, paid in instalments, include stock, or tie part of the value to future performance via earn-outs. If there’s an earn-out, make sure the calculation is clearly defined in the LOI (not just left for the final contract), and that you’re confident in the targets being set.
There are ways to de-risk earn-outs – like catch-up clauses or bonuses for over-performance – but these need to be discussed up front. Don’t accept vague terms; misalignment here often leads to broken deals.
Conditions to meet Before Closing
Most LOIs include closing conditions—typically covering due diligence, financing, and final agreement on transaction documents. These can vary based on the buyer’s profile, so be clear on what’s required and by when.
For example, if financing is a condition, it can add serious delays and risk—ask for guarantees before signing the LOI. Buyers may also expect key team members to stay post‑deal, which can come with unexpected asks around retention or incentives.
Don’t rely on what’s written in the LOI alone—many buyers won’t spell out every expectation upfront. Be proactive in uncovering implicit conditions early to avoid surprises that could derail the deal later on. An M&A advisor can help you identify the key points to go over in your specific situation.
Due Diligence Phase
During due diligence, buyers typically request access to a wide range of information: financials, customer data, contracts, operations, and sometimes interviews with key team members.
Transparency is important, but so is protecting your time and team. Set clear boundaries and agree in advance on what will be shared, how, and when, so the process doesn’t disrupt the day-to-day.
It’s worth flagging: this phase is intense. Responding to requests, preparing documents, and managing buyer access takes real time – especially if you’re handling it on your own.
For a deeper look at what to expect, see our Top 10 tips for SaaS due diligence
Exclusivity Period
Most LOIs include an exclusivity clause, meaning that for a set period, you can’t engage with other buyers.
It is one of the few legally binding clauses in an LOI and is not to be taken lightly.
Exclusivity gives the buyer space to run diligence without worrying about competing offers, but it also shifts the leverage. Once you’ve signed, your ability to negotiate—or walk away—diminishes, while the buyer retains full optionality. That’s why the length of the exclusivity period matters, and why you shouldn’t enter it blindly.
Make sure the timeline is reasonable, tied to clear next steps, and gives the buyer enough time to move forward—without letting things drag or exposing you to unnecessary risk.
There’s no shortage of cautionary tales where buyers have dragged processes out for months, tried to re-trade on terms, and left sellers with nothing but lost time, a distracted team, and a weaker business.
⚠️ There’s no shortage of cautionary tales where buyers have dragged processes out for months, tried to re-trade on terms, and left sellers with nothing but lost time, a distracted team, and a weaker business.
Intellectual Property
In businesses where IP is central to value, it’s critical to ensure the LOI clearly outlines what IP is being transferred and under what terms.
Make sure ownership is properly documented and transferable. Any grey areas or unresolved disputes should be addressed before signing the LOI, as buyers will scrutinise this closely during due diligence.
If your business relies on third-party licenses or partnerships, check whether these agreements can be assigned to the buyer—or if they’ll need to be renegotiated. Getting ahead of IP clarity early helps avoid delays and protects deal value.
Indemnification clauses and their impact
Indemnification clauses make you liable for certain risks that may arise after the deal closes—like tax issues, legal disputes, or contractual problems that pre-date the sale.
While the specifics are usually negotiated later in the final agreement, some buyers will reference indemnification terms in the LOI to set expectations. It’s worth paying attention—these clauses can carry serious financial consequences.
Make sure you understand what’s being asked, and be ready to push for clear limits on both amount and duration during the final negotiations.
Protection of Confidential Information
Unlike most of the LOI, confidentiality is binding. If you’ve already signed an NDA, the LOI should reference it. If not, make sure confidentiality terms are clearly included.
You’ll be sharing sensitive information—financials, customer data, proprietary tech—so it’s essential that protections are in place before you open the books. That way, if the deal falls through, you’re still covered.
Preparing for the LOI phase
The LOI sets the tone for the rest of the transaction. While most of its terms may be non-binding, that doesn’t mean they can be vague. Getting full alignment on the key commercial points before signing is absolutely critical if you want the deal to have a real shot at closing. Even when both parties are genuinely motivated to get a deal done, things can still fall apart if expectations aren’t clearly set
Even when both parties are genuinely motivated to get a deal done, things can still fall apart if expectations aren’t clearly set at the LOI stage—vague terms often lead to misunderstandings that derail the process. And in some cases, a buyer might try to push you to get an LOI signed quickly, aiming to lock you into exclusivity and gain leverage – don’t let the pressure get to you; only sign once you’re absolutely confident in the terms.
If an LOI feels too simple or too good to be true, it probably is!
An experienced M&A advisor will help you avoid these pitfalls—by making sure the right terms are covered early, and by guiding you on when to bring in legal counsel with the right M&A expertise for your type of deal.
Written in collaboration with Barlow & Williams, M&A law firm for the Digital Age
