• A Letter of Intent (LOI) is a preliminary agreement to deal commitments between parties.
  • An LOI contains the terms of a business transaction deal.
  • It is often useful when two companies are bought together to lay out the broader terms before delving into the finer details.
  • An LOI contains similar contents to a term sheet, outlines stipulations, timelines, and the requirements of the deal. 
  • LOIs often include non-disclosure agreements.

What Is a Letter of Intent?

A letter of intent (or “LOI”), outlines the initial commitment between two parties in a business transaction. The document contains the major terms and conditions of the deal under consideration and settles key differences in management, price, and financing. The entire value of the company is assessed and presented on a cash-free debt-free basis. 

Companies use a LOI to avoid investing undue time, energy and money into preparing detailed and definitive agreements or conducting substantial due diligence in the early stages of a deal. Many letters include a provision that the deal will only go through if financing is secured, and can be abandoned if papers are not signed by a deadline. The The LOI helps investors determine how interested the other party is in the deal. 

See also: Mastering the Pre-Diligence Phase of the Acquisition Process

The Purpose of a Letter of Intent

Depending on the deal, a LOI may be binding or non-binding. Some sponsors may want to lock the other party into the deal, while others still want to conduct additional due diligence on the deal before committing. Commonly, LOIs will include both binding and non-binding provisions in distinctly separated clauses. 

The LOI covers a range of topics, including but not limited to confidentiality, transaction structure, mergers, asset purchase, stock purchase, assumed liabilities, purchase price, deal termination provisions, payment terms, earnouts, form of payment, bust-up or break-up fees, statement conditions, representations and warranties, and incomplete deal fees. 

Letter of Intent in Private Equity 

The LOI is a framework that aligns the direction and investment thesis of both sides of a deal. For the company selling,...