Glossary
Letter of Intent (LOI)
A letter of intent (LOI) is a document that sets out the principal terms of a proposed acquisition or investment, such as price, structure, financing, diligence period and exclusivity, before the parties negotiate definitive agreements. Most terms are non-binding, but provisions like exclusivity, confidentiality and expenses usually are binding.
How it is used in underwriting
The LOI is where underwriting first becomes a commitment. A buyer's offer price and structure reflect its preliminary underwriting of earnings, cash flow and risk, and the LOI typically includes the purchase price, whether it is cash-free and debt-free, the working capital approach, any seller note or earnout, financing contingencies, key diligence items, management arrangements, and an exclusivity period. For sellers, the LOI is the point of maximum leverage, because once exclusivity is granted, competing bidders fall away. Detailed LOIs reduce later renegotiation; vague ones invite it.
Underwriters should treat the LOI price as conditional on diligence. Quality of earnings findings, customer calls, legal review and lender requirements often change the numbers, and buyers who discover problems may seek price reductions or structural protections such as escrows. Sellers can reduce retrading by insisting on specific terms, including the definition of working capital and the treatment of known issues. In commercial real estate, an LOI covers price, deposit, due diligence and closing periods, and financing contingency. Whether a particular LOI provision is binding depends on its wording and governing law, so counsel should review it before signing.
Frequently asked questions
Is a letter of intent legally binding?
Most of an LOI is typically non-binding, meaning either party can walk away before definitive agreements are signed. However, certain provisions are usually expressly binding, including exclusivity or no-shop, confidentiality, expense allocation and governing law. The document's wording determines what is binding, so legal review is important.
What should be included in an LOI?
A strong LOI covers purchase price and form of consideration, deal structure, treatment of cash, debt and working capital, any seller financing or earnout, financing and diligence conditions, key employment arrangements, an exclusivity period, expected timeline and which provisions are binding. More specific terms reduce renegotiation later.
What is the difference between an LOI and a term sheet?
Both summarize proposed deal terms before definitive documents. LOI is the common term for acquisitions of companies or properties, often in letter form. Term sheet is more common for financings, such as loans or equity investments, and is usually a bulleted summary. Neither is generally binding on the main economic terms.
Related terms
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