Letters of Intent in Business Acquisitions: What Is Binding and What Is Not
| John M. McCormick | business, Mergers & Acquisitions
Quick Answer
A letter of intent (LOI) sets out the main business terms of an acquisition before the parties spend money on due diligence and final documents. Most of an LOI is usually non-binding, but certain provisions, such as confidentiality, exclusivity, expenses, and governing law, are typically binding. The biggest risk is unclear drafting: if the language and the parties' conduct suggest they intended to be bound, a court may treat more of the LOI as an enforceable agreement than anyone expected.
This article is part of our Legal Guide to Buying or Selling a Business.
The LOI is often treated as a formality. It is not. It is the point where the seller usually has the most leverage, and the terms agreed here tend to anchor everything that follows in the purchase agreement.
What Is a Letter of Intent in a Business Acquisition?
An LOI (sometimes called a term sheet or indication of interest) is a written summary of the proposed deal. It lets both sides confirm they agree on the fundamentals before the buyer invests in diligence, financing, and legal work, and before the seller opens its books.
What Should an LOI Include?
- Purchase price and how it will be paid: cash at closing, seller financing, earnout, rollover equity, or a combination
- Deal structure: asset purchase or stock or membership interest purchase
- Any escrow, holdback, or working capital adjustment
- Due diligence scope and timeline
- Key conditions to closing, such as financing, landlord consent, or license transfers
- The seller's transition role, consulting arrangement, or employment after closing
- Non-compete and non-solicitation expectations
- Exclusivity period and confidentiality obligations
- Target closing date
For a deeper look at the structure decision, see our guide to asset purchase vs. stock purchase.
Which LOI Provisions Are Binding?
| Usually Non-Binding | Usually Binding |
|---|---|
| Purchase price and payment terms | Confidentiality |
| Deal structure | Exclusivity or no-shop period |
| Closing conditions and timeline | Responsibility for each side's expenses |
| Employment and transition terms | Governing law and dispute resolution |
| Non-compete terms | Statement that the LOI is non-binding except as specified |
The LOI should state clearly which sections are binding and which are not, and that no party is obligated to complete the deal until a definitive agreement is signed. Ambiguous phrases such as "the parties agree" in the business terms, combined with conduct like starting the transition early, can create disputes about whether a contract was formed. In both Virginia and North Carolina, an LOI can bind the parties to the deal itself if they agree on sufficiently definite material terms and intend to be bound now, regardless of the document's title.
Does an LOI Create a Duty to Negotiate in Good Faith?
Virginia and North Carolina answer this differently. Courts in both states look at the actual language rather than the label, and they ask separately whether the LOI binds the parties to close, to perform specific interim promises such as confidentiality or exclusivity, or to negotiate. In Virginia, a federal court applying Virginia law held that a promise to negotiate toward a mutually acceptable contract was an unenforceable agreement to agree, while allowing claims on the LOI's binding confidentiality and no-marketing promises (Beazer Homes Corp. v. VMIF/Anden Southbridge Venture, E.D. Va. 2002). In North Carolina, the Business Court has enforced a sufficiently definite, expressly binding promise to negotiate in good faith, though not as an obligation to close, and has refused to find that duty in generally nonbinding LOI language. If you want a negotiation commitment to be enforceable, or want to be sure there is none, the LOI should say so expressly.
How Long Should Exclusivity Last?
Exclusivity prevents the seller from negotiating with other buyers while the buyer completes diligence and financing. Buyers want enough time to finish the work, especially when a lender is involved. Sellers want it short, with a clear end date and the right to terminate if the buyer stops making progress or changes the price. The length is negotiated case by case and should match a realistic diligence and financing timeline.
Attorney Insight
Sellers give up most of their leverage the moment they sign exclusivity. Before signing, I want the important business terms settled in the LOI: structure, how the price is paid, working capital expectations, and the seller's post-closing role. Leaving those for the purchase agreement usually means negotiating them later from a weaker position.
Common LOI Mistakes
- Leaving the payment terms vague, such as "a portion of the price may be financed"
- Not addressing working capital, which can lead to a surprise price reduction at closing
- Agreeing to a long exclusivity period without progress milestones
- Signing before speaking with a CPA about the tax impact of the proposed structure
- Using a template that accidentally makes business terms binding
Frequently Asked Questions
Is a letter of intent legally binding?
Usually only in part. Confidentiality, exclusivity, and similar provisions are typically binding. The business terms usually are not, but only if the LOI says so clearly.
Can the price change after the LOI is signed?
Yes, and it often does if diligence uncovers problems. Sellers can reduce this risk by being transparent early and preparing for diligence before going to market.
Do I need an attorney to review an LOI?
It is the best time to involve one. Terms set in the LOI are difficult to renegotiate later, and drafting errors can create unintended obligations.
Continue Reading
- The Legal Guide to Buying or Selling a Business (start here)
- Asset Purchase vs. Stock Purchase: Choosing the Right Deal Structure
- Legal Due Diligence Checklist for Buying a Business
- Reps, Warranties, and Indemnification in a Purchase Agreement
- Earnouts and Seller Financing: Bridging a Valuation Gap
- Buying a Business With an SBA Loan: The Legal Steps
- How to Prepare Your Business for Sale: A Legal Checklist
- Non-Competes, Employees, and Key Contracts in a Business Sale
- Buying or Selling a Business in Virginia
- Buying or Selling a Business in North Carolina
Talk With an M&A Attorney Before You Sign
McCormick Law & Consulting represents buyers and sellers in business acquisitions, primarily in Virginia and North Carolina and in transactions that cross state lines. The transactions in which we have represented a party total hundreds of millions of dollars in combined deal value, a measure of the size of those deals, not of amounts recovered or earned for clients. We have formed roughly a thousand new business entities and currently represent hundreds of businesses, so we approach every deal from the operating side as well as the legal side. Every transaction is different, and the size or outcome of past deals does not predict the result in yours.
With offices in Norfolk, Virginia and Raleigh, North Carolina, we handle most of our transactions in those two states and also assist clients with multistate transactions. If you are buying or selling a business, a short call early in the process can save time, money, and leverage later. Learn more about our mergers and acquisitions practice.
This article provides general information only. It is not legal, tax, or financial advice and does not create an attorney-client relationship. Laws differ by state and change over time. Our attorneys are licensed in Virginia and North Carolina. We assist clients with business transactions involving multiple states. For matters involving the law of a state where we are not licensed, we associate with appropriately licensed counsel or otherwise proceed only as permitted by applicable law.