Why a Letter of Intent?

Why Every Share Transaction Should Start with a Letter of Intent

By Mark D. Hazlett

In the fast-paced world of business acquisitions, it’s tempting to jump straight into due diligence or even right into drafting a definitive share purchase agreement. But seasoned dealmakers know that one document can make or break the efficiency and clarity of the entire transaction: the Letter of Intent (LOI).

While often viewed by inexperienced dealmakers as a formality, and sometimes even done without the assistance of deal counsel (gasp!) the LOI is an important strategic instrument that sets the tone, structure, and expectations for the deal. For business owners, executives, and investors, understanding its role is essential to protecting your interests and ensuring a smooth transaction.

What Is a Letter of Intent?

A Letter of Intent is a preliminary agreement that outlines the key terms of a proposed share transaction. It is typically non-binding in nature—except for certain provisions—but it serves as a critical roadmap for the deal.

An LOI usually addresses:

• Purchase price and valuation methodology
• Structure of the transaction (e.g., share vs. asset purchase)
• Payment terms (cash, shares, earn-outs, etc.)
• Key conditions to closing
• Exclusivity and confidentiality provisions
• Timelines for due diligence and closing

Why Does an LOI Matter to Business Owners (or prospective ones)?

1. Reduces Ambiguity Early On

   An LOI ensures that both parties are aligned on the major commercial terms before legal fees and management time are invested in full-scale negotiations. It helps identify deal-breakers early, and avoids costly misunderstandings later.

2. Protects Your Negotiating Position

   For Buyers, exclusivity clauses prevent the Seller from shopping the deal around. For Sellers, the LOI can lock in key valuation terms and limit the scope of post-LOI renegotiation. It’s a tactical tool that can preserve leverage on both sides.

3. Streamlines the Legal Process

   A well-drafted LOI acts as a blueprint for the definitive share purchase agreement. It accelerates the drafting process, narrows the scope of negotiation, and reduces the risk of protracted legal wrangling.

4. Facilitates Focused Due Diligence

   With an LOI in place, the Buyer can proceed with due diligence knowing the Seller is committed to the deal in principle. This allows for a more efficient and targeted review of financials, contracts, liabilities, and compliance matters.

5. Demonstrates Serious Intent
   Signing an LOI signals to stakeholders—investors, lenders, and internal teams—that the parties are serious about the transaction. It builds trust and momentum, both of which are essential in closing complex deals.

Binding vs. Non-Binding: Know the Difference

While the commercial terms of an LOI are typically specified as to be non-binding, certain provisions—such as confidentiality, exclusivity, governing law, and dispute resolution—are often expressly binding. It’s critical to clearly delineate which terms are to be considered enforceable at law and which are not, to avoid unintended legal consequences.

Implications of Signing an LOI

Even though the majority of LOI terms are usually designated as non-binding, they are still generally viewed as an agreement in principle on major deal terms.  This can mean that it can be difficult to change on these terms going forward, as requesting deviations from the LOI is often not well received by opposing counsel and their clients.  Therefore, even the non-binding terms of an LOI can have significant influence on how the deal will unfold.

The binding terms of course directly limit what the parties can do; perhaps the most significant of which is if there is an exclusivity period while the prospective Buyer conducts its due diligence. These will greatly limit the Seller’s opportunities to shop the business or even take a better offer if one just presents itself. Generally, these provisions have a timeout that a definitive agreement must be entered into or else they expire.

Final Thoughts

In share transactions, the Letter of Intent is not just a procedural step—it’s a strategic document that can shape the entire deal. For business leaders and owners, engaging legal counsel early to draft or review the LOI is not just prudent—it’s essential.

A well-crafted LOI can save time, reduce risk, and increase the likelihood of a successful closing. In today’s competitive M&A landscape, that’s an advantage no business can afford to overlook.