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A Letter of Intent (LOI) formalizes preliminary agreements prior to a definitive contract. For M&A, partnerships, or major agreements: a step between negotiation and final conclusion. Legal status is mixed — certain parts are binding (confidentiality, exclusivity), others are not (commercial terms). It is important to distinguish between them. Virtually standard for SME acquisitions. Below are the content, pitfalls, and legal status.
The short answer
- What: provisional agreement preceding a definitive contract.
- Other names: LOI (Letter of Intent), term sheet, memorandum of understanding.
- Legal status: partly binding (NDA, exclusivity), partly non-binding (commercial).
- Usage: M&A, partnerships, major contracts, joint ventures.
- Goal: demonstrate commitment, record key points, room for due diligence.
What is an LOI?
Written document with:
- Identification of parties.
- Proposed transaction (M&A, collaboration, major acquisition).
- Key points (price, structure, timing).
- Conditions for proceeding (due diligence, financing, board approval).
- Confidentiality and exclusivity (binding).
- Duration of LOI.
Not identical to definitive contract — pending further negotiation.
Binding vs. non-binding
Binding
- NDA: confidentiality of information exchange.
- Exclusivity: temporarily no negotiation with others.
- No-shopping clause: do not actively seek alternatives.
- Duty to negotiate in good faith.
- Reimbursement of costs: in case of termination in bad faith.
- Applicable law and court.
Non-binding
- Purchase price (subject to change after due diligence).
- Deal structure.
- Specific conditions (warranties, etc.).
- Closing date (indicative).
Content of the M&A Letter of Intent
- Proposed transaction: share purchase, asset purchase, merger.
- Indicative purchase price: amount or formula (often dependent on due date).
- Form of payment: cash, shares, earn-out.
- Closing conditions: positive due diligence report, financing secured, board approval, permits.
- Due diligence access: data room, period.
- Exclusivity: typically 30-90 days for negotiation.
- Confidentiality: NDA provisions.
- Cost allocation:each with their own lawyer, jointly with an external one.
- Timeline: indicative milestones to closing.
- Binding / non-binding overview: clarity per article.
Risks at LOI
- Unintentionally binding: overly concrete formulations can be interpreted by the judge as binding.
- Leaks: among staff or customers — reputational damage.
- Waste of time: long LOI negotiations → delayed to final contract.
- Unexpected obligation: e.g. break-up fee upon termination.
Termsheet vs. LOI
- Term sheet: short, main points in bullet points (often for venture capital deals).
- LOI: more extensive, narrative, with procedural aspects.
- MoU (Memorandum of Understanding): comparable to LOI, more often for collaboration than for M&A.
Often similar in content — context determines the name.
Termination of LOI
LOI ends at:
- Final contract concluded.
- Expiration of term (typically 60-90 days).
- Non-fulfillment of closing conditions.
- Termination by party — consequences under LOI.
In the event of termination: binding parts (NDA, exclusivity) remain applicable for the agreed period.
Lars's M&A Letter of Intent
Lars is considering acquiring a small competitor. LOI:
- Indicative purchase price €1.2 million, subject to due date.
- Due diligence period 60 days.
- Exclusivity for 90 days.
- Confidentiality for 2 years.
- Closing conditions: Due Diligence positive, financing arranged.
- Indicative timeline: closing within 4 months.
Costs for drafting the LOI: €3,500 for Lars's lawyer. In case of sale: costs for the final contract are 10-50 times higher.
Honest recommendation
For M&A or major deals: a Letter of Intent (LOI) is almost standard. Invest in proper drafting by an M&A lawyer (€2,500-€10,000) — this prevents unintended binding obligations. Explicitly separate binding from non-binding. For exclusivity: a reasonable duration (30-90 days). Regarding a break-up fee: agree on this in advance. The LOI provides the basis for due diligence and the final contract — the investment pays for itself by preventing disputes.
For other topics: letter of intent regarding contribution, share purchase agreement , and due diligence.
Frequently Asked Questions
Written preliminary agreement preceding a definitive contract — Letter of Intent (LOI). For M&A, partnerships, and major agreements. Sets down key points, provides commitment, and allows for due diligence.
Partially: confidentiality, exclusivity, duty to negotiate in good faith, reimbursement of costs in case of bad faith — binding. Commercial terms (price, structure, guarantees) — non-binding (unless explicitly stated otherwise).
Parties, intended transaction, indicative price, form of payment, closing conditions, due diligence access, exclusivity, confidentiality, cost allocation, timeline, binding/non-binding per article.
Typically 30-90 days for negotiation. For larger or more complex deals: longer. Extension option if necessary. Too long: detrimental to the seller (no alternatives). Too short: insufficient time for due diligence.
Unintentionally binding due to overly concrete wording, leaks (reputational damage), loss of time during lengthy negotiations, or unexpected obligations such as a break-up fee. Good legal guidance prevents these risks.
Term sheet: short, main points in bullet points (VC deals). LOI: more extensive, narrative, with procedural aspects. MoU: comparable to LOI, more often used for collaboration. Name choice contextual; content comparable.
€2,500–€10,000 for an M&A lawyer. For complex international deals: €10,000–€50,000. Investing in a good Letter of Intent saves significant negotiation time at the final contract stage and prevents disputes.
