Buying or selling a business is rarely a single-step transaction. It moves through stages, and one of the earliest formal milestones is the letter of intent. Understanding what this document does before you sign it can shape how smoothly the rest of the deal proceeds.
Once a buyer and seller agree on the basic outline of a deal, the next step is usually a letter of intent, sometimes called a term sheet. For many first time buyers and sellers, the LOI is the first real legal document in the process, and it is easy to misunderstand what it actually locks in. Getting guidance from an experienced business attorney before you sign one can save both sides from confusion, and sometimes from a costly mistake, later in the deal.
What an LOI Typically Covers
A well drafted LOI outlines the proposed purchase price, the general deal structure (asset purchase or equity purchase), the expected timeline to closing, and any major conditions the parties expect to negotiate, such as financing, regulatory approval, or completion of due diligence. It also usually names the key people involved and sets expectations for how the deal will move forward.
Most of an LOI Is Not Binding, But Some of It Is
This is the part that catches people off guard. The price and deal terms in an LOI are almost always expressed as non-binding, meaning either side can walk away or negotiate different terms once diligence and drafting begin. However, most LOIs contain a handful of provisions that are fully binding regardless of whether the deal ultimately closes. Depending on the LOI, binding provisions commonly include confidentiality, exclusivity, governing law, expenses, access to information, and provisions addressing the binding or nonbinding effect of the LOI itself. Read these sections carefully, since they create real obligations the moment you sign, even if the rest of the document is aspirational.
Exclusivity Periods Deserve Special Attention
An exclusivity provision, sometimes called a no shop clause, prevents the seller from negotiating with other potential buyers for a set period of time, often thirty to ninety days. For a seller, agreeing to exclusivity means taking your business off the market while the buyer completes diligence, so it is worth thinking carefully about the length of that window and what happens if the deal falls apart during it. For a buyer, exclusivity is often the whole point of the LOI, since it protects the time and expense of running diligence without the risk of losing the deal to a competing bidder partway through.
Confidentiality Obligations Survive the LOI
Confidentiality provisions in an LOI typically apply whether or not the deal ever closes, and they often survive for a period of years afterward. Both sides should be clear on what information is covered and who inside their organization is permitted to see it, particularly if employees who are not yet aware of a potential sale could be affected by information leaking internally.
Why the Non-Binding Terms Still Matter
Even though price and structure are usually non-binding, it is a mistake to treat them as unimportant. Once an LOI is signed, both sides typically begin investing real time and money into diligence, legal drafting, and sometimes financing arrangements. Walking away from agreed terms later in the process, even when legally permitted, can damage trust between the parties and add delay and cost to a deal that might otherwise have closed smoothly. Getting the substantive terms as close to right as possible at the LOI stage tends to produce a faster and less contentious path to a signed purchase agreement.
Negotiating the LOI Itself
Because so much of the LOI is non-binding, it is tempting to treat the negotiation casually. That is usually a mistake. The LOI sets the frame for everything that follows, including how disputes get resolved if the parties disagree later about what was originally intended. Having your business attorney review the LOI before you sign, rather than after, gives you the chance to flag issues with exclusivity length, confidentiality scope, or ambiguous deal terms while they are still easy to fix.
The Bottom Line
An LOI is a short document that can have an outsized effect on how the rest of your deal unfolds. Understanding which provisions bind you immediately and which remain open for negotiation is the first step to using the LOI stage to your advantage, whether you are buying or selling.
This blog is for informational purposes only and does not constitute legal advice. If you have received or are preparing to send a letter of intent, contact Brown & Blaier, PC to discuss your specific transaction.