Letter of Intent
Executive Summary
Key Takeaways
- ✓ A letter of intent is a largely non-binding agreement setting out a proposed transaction's indicative price, structure, and key terms, typically including a binding exclusivity provision as one of its few enforceable elements.
- ✓ Signing a letter of intent marks the transition from preliminary due diligence, based on limited information, to confirmatory due diligence, conducted with full data room access during the exclusivity period.
- ✓ Exclusivity is typically the one substantively binding provision in an otherwise non-binding letter of intent, since it is what gives the buyer confidence to invest in the cost of full confirmatory diligence.
- ✓ The indicative price range in a letter of intent is not a final price — it is explicitly subject to the findings of confirmatory diligence, and a material adverse finding during that phase can lead to renegotiation or, in some cases, withdrawal.
- ✓ A seller granting exclusivity accepts the risk of losing process momentum and other prospective bidders if the exclusive buyer's confirmatory diligence does not lead to a signed agreement, making the decision to grant exclusivity a significant one in its own right.
Definition¶
A letter of intent (LOI), sometimes called a term sheet or memorandum of understanding, is a largely non-binding agreement between a prospective buyer and seller setting out a proposed transaction's indicative price, structure, and key terms. It typically marks the transition point within Buy-Side Due Diligence from preliminary diligence, based on limited information, to confirmatory diligence, conducted with full data room access during the exclusivity period the letter of intent establishes.
Binding vs. Non-Binding Provisions¶
Most substantive commercial terms in a letter of intent — the indicative price, the proposed structure, the general timeline — are expressed as non-binding, subject to the outcome of confirmatory diligence. A small number of specific provisions, however, are typically drafted to be binding:
| Provision | Binding Status | Purpose |
|---|---|---|
| Indicative price and structure | Non-binding | Establishes a working basis for confirmatory diligence, not a final commitment |
| Exclusivity | Typically binding | Gives the buyer confidence to invest in full confirmatory diligence without competing bidder risk |
| Confidentiality | Typically binding | Protects information exchanged during the process regardless of whether a transaction results |
| Cost allocation for a failed process | Sometimes binding | Allocates diligence costs if the transaction does not proceed to signing |
Why Exclusivity Is the Key Commercial Term¶
Exclusivity is typically the one substantively binding provision in an otherwise non-binding letter of intent, and its inclusion reflects the practical reality that confirmatory diligence is costly and time-intensive. A buyer is generally unwilling to commit that investment without assurance the seller will not simultaneously shop the deal to competing bidders; a seller granting exclusivity, in turn, accepts the risk of losing process momentum and alternative bidders if the exclusive buyer's diligence does not ultimately lead to a signed agreement.
Audit Considerations¶
- Confirm the letter of intent clearly distinguishes binding from non-binding provisions, avoiding ambiguity over which commitments are actually enforceable
- Confirm the exclusivity period's duration is appropriate to the scope of confirmatory diligence required, balancing buyer diligence needs against seller process risk
- Confirm the indicative price range's key assumptions are documented, so any subsequent renegotiation during confirmatory diligence can be traced to a specific, identified finding
Continue Reading¶
Prerequisites¶
- M&A and Transaction Due Diligence — the parent pillar
Related Technical Guides¶
Related Glossary¶
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Frequently Asked Questions
What is a letter of intent?
A largely non-binding agreement between a prospective buyer and seller setting out a proposed transaction's indicative price, structure, and key terms, typically following preliminary due diligence and preceding confirmatory due diligence.
Is a letter of intent legally binding?
Generally not in its substantive commercial terms — the indicative price and structure are typically expressed as non-binding — but specific provisions, most commonly the exclusivity clause and confidentiality obligations, are typically drafted to be binding.
Why does a letter of intent typically include a binding exclusivity provision?
Because it is what gives the buyer confidence to invest the significant cost and time required for full confirmatory due diligence — without exclusivity, a buyer risks conducting extensive diligence only to lose the deal to a competing bidder.
Is the price in a letter of intent final?
No — it is an indicative range, explicitly subject to the findings of confirmatory due diligence. A material adverse finding during confirmatory diligence commonly leads to renegotiation of the final price, or in some cases withdrawal from the process entirely.
What risk does a seller accept by granting exclusivity?
The risk of losing process momentum and other prospective bidders if the exclusive buyer's confirmatory diligence does not ultimately lead to a signed agreement — since other bidders are typically excluded from the process during the exclusivity period, a seller effectively pauses competitive tension in exchange for progressing with a single buyer.
Related Articles
Buy-Side Due Diligence
Buy-side due diligence is the due diligence process run by, or on behalf of, a prospective acquirer, investigating a target business before the acquirer commits to a price and signs a transaction agreement. It typically runs in phases — preliminary diligence ahead of a non-binding offer, then confirmatory diligence during an exclusivity period ahead of signing — across the seven standard workstreams, with findings flowing into the acquisition model, the purchase agreement's protective terms, and the final negotiated price.
M&A and Transaction Due Diligence
Transaction due diligence is the structured process by which a party to a proposed transaction — most often a buyer, but also a seller preparing for sale or a lender financing the deal — investigates a target business before committing capital. It is organized into distinct workstreams (financial, commercial, operational, technical, legal, tax, ESG), run from one of three process postures (buy-side, sell-side, or vendor), and its findings feed directly into the financial model used to price the transaction and support the investment decision. This page is the hub for the Knowledge Centre's transaction due diligence content: what due diligence is, how each workstream and process posture differs, and how model risk specifically enters a transaction — the angle this platform is built to address in depth.
Due Diligence
Due diligence is the structured investigation a party to a proposed transaction conducts before committing capital — verifying facts, quantifying risk, and testing the assumptions underlying the deal's price. In an M&A or transaction context it is organized into distinct workstreams (financial, commercial, operational, technical, legal, tax, ESG) and run from one of three postures depending on who commissions it (buy-side, sell-side, or vendor).
Material Adverse Change
A material adverse change (MAC) clause is a provision in a purchase agreement defining the circumstances under which a buyer may walk away from, or seek to renegotiate, a signed transaction if the target's business deteriorates significantly between signing and closing. It exists because a transaction is typically signed before it closes, particularly where regulatory approval or financing conditions must be satisfied, creating a gap during which the target's business condition could change materially from what was diligenced.