M&A & Due Diligence
What Is a Letter of Intent (LOI)?
A Letter of Intent (LOI) is the pre-due-diligence document where buyer and seller agree on price, structure, and timeline before the definitive agreement. Most provisions are non-binding and subject to definitive agreement, but exclusivity, confidentiality, and expense allocation are typically binding. The LOI largely determines whether the deal goes well, so its terms carry real weight despite the non-binding label.
A Letter of Intent (LOI) is the pre-due-diligence document where buyer and seller agree on price, structure, and timeline. Most provisions are non-binding ("subject to definitive agreement") but exclusivity, confidentiality, and expense allocation are typically binding. It's the document that determines whether the deal goes well.
Standard LOI provisions
- Purchase price and consideration structure (cash, stock, rollover equity)
- Working capital target (with seasonality math if relevant)
- EBITDA definition (what's in, what's out)
- Earnout structure if applicable
- Holdback / escrow size and term
- Conditions to closing (financing, regulatory, key person retention)
- Exclusivity period — usually 30-90 days
- Confidentiality + expense allocation
- Diligence timeline and access rights
What's binding vs non-binding
Typically binding: exclusivity, confidentiality, expense allocation. Typically non-binding: price, structure, indemnity, earnout, conditions to closing — all subject to definitive agreement (the SPA / APA negotiated after diligence).
What sellers should fight for at LOI
- EBITDA definition. Lock in what's included before diligence begins. Disputes over add-backs and definitions in the SPA are 3x harder.
- Working capital target. Negotiate seasonality math now, not later.
- Exclusivity expiry on diligence delays. If buyer doesn't move fast enough, exclusivity should drop.
- Earnout protections. Operating-standard language belongs in LOI.
- Confidentiality scope. Avoid overly broad non-solicitation of employees.
The most common mistake
Treating the LOI as a checkpoint instead of the foundation. The terms agreed in the LOI shape every subsequent negotiation — once you've conceded exclusivity, the buyer has leverage to push on every other term during diligence. Negotiate the LOI like you're negotiating the final deal.
Frequently Asked Questions
What's an LOI?
Pre-diligence document setting price, structure, timeline.
What's binding?
Exclusivity, confidentiality, expense allocation.
What should sellers fight for?
EBITDA definition, WC target, exclusivity protections, earnout structure, confidentiality scope.
Related Terms
- What is a holdback?
- What is an earnout?
- What is WC true-up?
- What is QofE?
Browse the full ecommerce finance glossary for every metric and money term a DTC operator needs.
Negotiating an LOI? Talk to a CFO.