The Letter of Intent: A Critical Stage in an M&A Transaction
Executing a Letter of Intent in M&A represents one of the most important milestones in the transaction process. The LOI establishes the principal business terms before the buyer begins extensive due diligence and definitive agreement negotiations.
Most provisions within an LOI remain nonbinding, with important exceptions often including confidentiality and exclusivity. However, sellers should not mistake nonbinding terms for unimportant terms. The LOI establishes expectations that often shape negotiations through closing.
Exclusivity makes this stage particularly important for sellers. After signing an LOI, sellers typically stop discussions with other prospective buyers for an agreed period. Meanwhile, the selected buyer gains access to confidential information and begins detailed due diligence. Therefore, sellers sacrifice competitive leverage when they grant exclusivity.
Before signing, sellers and their advisors should carefully evaluate three important areas:
- Thoroughness of business terms. The LOI should clearly address purchase price, consideration, structure, working capital, timing, and other material terms.
- Assessment and disclosure of risk. Sellers should identify significant issues that could affect valuation, negotiations, or closing.
- Accuracy of underlying information. Financial and operational information supporting the buyer’s offer should be complete, accurate, and defensible.
A seller should also evaluate contingencies, financing requirements, due diligence expectations, and the proposed exclusivity period. Addressing these matters early may reduce misunderstandings and limit unnecessary renegotiation later.
However, sometimes a buyer submits an incomplete or poorly structured LOI. The seller does not need to accept that document as the framework for negotiations. Instead, the seller and M&A advisor may prepare a reverse Letter of Intent outlining terms acceptable to the seller. A reverse LOI may clarify ambiguities, address omitted terms, and establish a stronger framework for continued negotiations. More importantly, it allows the seller to respond to comprehensively rather than negotiating numerous provisions individually.
Once both parties execute a Letter of Intent in M&A, changing fundamental business terms may become difficult. Significant changes may damage trust unless new information or circumstances justify them. Therefore, both parties should resolve major economic and structural issues before signing.
The LOI does not represent the end of negotiations. Rather, it establishes the framework for due diligence, definitive agreements, and the remaining transaction process. Experienced M&A advisors help sellers negotiate that framework carefully while preserving value, leverage, and the likelihood of a successful closing.
