Write the Perfect Letter of Intent (LOI)

Letters of Intent (LOIs) may look simple, but they communicate a powerful message. Learn how to write the perfect letter of intent (LOI), one that best protects the interests of both buyers and sellers. (The following does not constitute legal advice, which Kuhn Capital is not qualified to give.)

This article covers:

• The role of letters of intent in M&A transactions
• A list of key LOI components
• An LOI template
• How to negotiate LOI terms
• A sample “perfect” LOI

The Situation

You’ve spent several months working on a CIM with your M&A advisor. Now, some acquirers who received it have expressed interest in the next steps. (As for what’s in a CIM, see our “The Perfect Confidential Information Memorandum.”)

Your advisor then preliminarily confirms that these suitors appear qualified—unlikely to be tire kickers, financial lightweights, flimflammers, etc.—and helps you prepare to meet with them for a discussion of business backgrounds and interests.

If things go well, your advisor will let your guests know then or later that LOIs are due in three weeks. (Depending on circumstances, the advisor may also solicit LOIs before scheduling buyer meetings.)

Wait. LOIs?

The LOI’s Role in M&A Transactions

Once executed, an LOI becomes the roadmap that guides buyers and sellers to an M&A transaction close. It lays out preliminary purchase terms, estimated milestone completion dates, conditions to close, and other agreed-upon obligations. In so doing, it screens out low-ball valuations, unserious bids, unacceptably lengthy closing dates, risky contingencies, etc. Importantly, it’s the first mutual agreement between buyer and seller, and its purpose is to guard against misunderstandings over who delivers what as the parties plow through the demanding due diligence tasks ahead.

Key Sections of the Perfect LOI

• The Term or period of time during which LOI obligations apply.
• Transaction Structure: Specifies whether the deal is an asset purchase, stock purchase, or merger. Structure determines who acquires what taxes and liabilities, and what regulatory compliance, if any, lies ahead.
• Purchase Price and Payment Schedule: Details the target’s value, schedule of when and what payments are to be made.
• Sources of Funding: Identifies the origins and forms of payment — cash, stock, third-party and seller debt, retained seller equity, earnout, etc.
• Due Diligence: Outlines the scope and schedule of the buyer’s review of the seller’s financials, operations, legal matters, and other key data. (The perfect CIM will have already addressed about 80% of these concerns, with each buyer seeking more information unique to their acquisition rationale. They will also access sensitive employee, client and supplier files archived in the seller’s data room or VDR.
• Confidentiality: Even if the buyer has already signed an NDA, another version is often incorporated into the LOI, covering the fact that the parties are discussing M&A.
• Exclusivity (“No-Shop” Provision): Requires that the seller cease contact with any other potential buyer during the Term. This protects the buyer from investing in due diligence and deal negotiations only to be bested by a competing buyer before close.
• Ownership of Expenses: Both parties typically agree that each will pay their own transaction expenses. A common exception is a seller’s Quality of Earnings analysis, designed to precisely adjust EBITDA. While QoE costs are negotiable between the parties, sellers often pay them.
• Conditions to Closing: A brief list of the prerequisites that the seller and buyer must satisfy before closing. Examples: regulatory approvals, proof of financing, and resolution of seller issues, such as pending or potential lawsuits.
• Reps and Warranties: Summarizes the assurances each party makes to the other regarding their operations and obligations.
• Ordinary Course: Proscribes “extraordinary” seller activities during the Term.
• Termination Rights: Defines the circumstances under which a party can withdraw from the deal. Also defines any associated penalties or obligations, if applicable.
• Governing Law and Dispute Resolution: Specifies the legal jurisdiction that governs how to apply the LOI’s binding elements and how to resolve buyer/seller disputes. As to jurisdiction, it’s among the first of many negotiations between the parties. To resolve disputes, both parties typically prefer arbitration for its lower costs and greater speed.

LOIs (usually just two to four pages when describing a $10 million to $100 million deal), address the sections above only in summary form; they reserve definitive language for the purchase agreement. (See a description of the perfect purchase agreement here.)

Upon receipt, the seller’s advisor will compare LOIs and then leverage competition (real or imagined) by returning to the strongest bidder(s) to negotiate more generous terms.

Binding vs. Non-Binding LOI Provisions

While LOIs are mostly non-binding, they almost always include at least three binding obligations. Those are confidentiality, exclusivity, and governing law. However, LOIs for deals in the $100 million EV range may also contain a fourth binding passage—a “break-up” fee. It states that the seller must pay the buyer if the seller abandons negotiations, typically because of a more attractive offer. Buyers may also pay sellers break-up fees when regulators threaten to prohibit the transaction.

LOI vs. IOI/EOI — What’s the Difference?

• Detail and Specificity: An IOI (Indication of Interest) and EOI (Expression of Interest) provide a broad overview and typically give only a range rather than a discrete deal value. In contrast, an LOI offers detailed terms and a specific purchase price.
• Binding Provisions: IOIs/EOIs can be entirely non-binding, whereas LOIs contain binding clauses as described above.
• Level of Commitment: In general, an IOI/EOI is less formal and will indicate less commitment than an LOI.

Despite the IOI/EOI’s lack of specificity, they have their uses. Advisors sometimes request them when faced with a large field of potential acquirers to narrow the list to a manageable number. Or they request an IOI/EOI from a buyer whose quality is indeterminate, and the advisor needs more information to assess its potential. Buyers may also submit an IOI/EOI early to determine whether they’ll be considered a competitive bidder. If not, they can save time and money by bailing now. A buyer may even use an IOI/EOI to shut down competition with an “exploding offer” that terminates when not accepted by a deadline.

Wrapping Up

The meticulously drafted LOI acts as a lighthouse, illuminating the issues the parties must resolve by working together in the days ahead. Because of its importance, the wise business owner seeks advice from an experienced M&A advisor and, in complex cases, legal counsel to avoid misunderstandings that can threaten the close. That said, this article on how to write the perfect Letter of Intent (LOI) should provide you with a solid understanding of its purpose and contents.

For some legal landmines to avoid when signing an LOI, see Findlaw’s brief article.

Now for a Perfect LOI Example

Mr. Fred Flintshard
CEO & Owner
Caveman Construction Company
123 Cave Path
Rockville, CA  94070
Date: June 14, 2026
Subject: Letter of Intent for the Acquisition of Caveman Construction Co.

Dear Fred;
It is our pleasure at BoulderBashers, Inc. (“Buyer”) to submit to you this M&A Letter of Intent, which sets forth the preliminary terms and conditions under which you (the “Seller”) wish to sell Caveman Construction Company to us (the “Transaction”).

This document reflects our mutual intent to proceed with negotiations and due diligence, with the objective of executing a definitive purchase agreement and closing between the parties by September 15, 2026. It is non-binding except for the provisions explicitly identified below.

1. Term
The term of this agreement shall be from the date of your signing below, which shall be no later than one week after the date above, to August 15, 2026 (“Term”).

2. Transaction Form
Buyer intends to acquire Seller’s Sub-chapter S corporation equity via a 338(h)(10) election. Buyer will gross-up Seller’s purchase cash consideration to compensate Seller for additional taxes that arise from using this election.

3. Purchase Price and Terms
We propose a total purchase price of up to $37 million dollars (“Purchase Price”) subject to the structure and adjustments as follows:

• $15.5 million in cash and $15.5 million in Buyer shares valued as of its weighted average price during the period of 45 days preceding the date of close.
• Of the $15.5 million in cash, $5 million will be held in escrow for 18 months post-close, with release conditioned on the absence of Seller breaches of the purchase agreement’s representations and warranties.
• Up to $5 million in an earnout based on the Seller’s attainment of at least a 15% average annual revenue growth rate with an average of at least 10% EBITDA to sales ratio during the three years following close. [For earnout details, see our Understanding Earnouts.]

4. Sources of Funding
The cash we spend on this Transaction will be sourced from our balance sheet.

5. Employment and Compensation
At closing, you will enter into a mutually acceptable employment agreement with Buyer that includes annual compensation of $250,000 per year, SEP-IRA contributions consistent with prior practice, a two-year post-employment noncompetition provision, and other such terms as may be jointly agreed.

6. Due Diligence
Buyer shall be granted a period of 75 days from the date of this LOI’s execution to conduct a comprehensive review of Seller’s financial, operational, legal, and regulatory affairs. Seller agrees to make reasonable commercial efforts to provide Buyer with timely assistance, cooperation, and access to all necessary Seller documentation and personnel.

7. Confidentiality
Both parties agree to maintain the confidentiality of all discussions, information, and documents exchanged during this process, pursuant to the terms of that previously signed Confidentiality Agreement dated May 15, 2026, and which is hereby extended to the Term.

8. Exclusivity
In consideration of the time and resources Buyer will commit to pursuing the Transaction, Seller agrees to an exclusivity period during the Term. During this period, Seller shall not solicit or entertain offers from other parties concerning the sale of Seller’s equity or assets. In the event that a third party attempts to discuss with Seller such matters, Seller will promptly report such contacts to Buyer.

9. Ordinary Course
During the Term, Seller will conduct its business in the ordinary course consistent with prior practice and will notify Buyer prior to entering into any extraordinary transactions or changing its accounting policies.

10. Expenses
Each party shall pay its own expenses related to the Transaction, except that you agree to commission a quality of earnings (QoE) analysis at Caveman Construction Company’s expense. The parties will agree on which QofE analyst will deliver this report.

11. Conditions to Closing
The proposed Transaction is subject to the satisfactory completion (as defined by Buyer) of the following conditions, among others:

• Due diligence.
• Execution of definitive agreements.
• Receipt of required regulatory approvals.
• Absence of material adverse changes to Seller’s business before close.
• A review of the Seller’s intellectual property protections and licenses.

12. Representations and Warranties
The parties acknowledge that the definitive agreements will include standard representations, warranties, indemnities, and covenants customary for transactions of this nature.

13. Closing Timeline
The parties agree to use their best reasonable commercial efforts to execute all definitive agreements by September 1, 2026, and to close the Transaction no later than the expiration of the Term.

14. Termination
Either party may terminate this LOI at any time prior to the execution of a definitive agreement, with no further obligation except for the binding provisions outlined herein.

15. Governing Law and Dispute Resolution
The laws of California shall govern the terms of this letter. The parties agree to resolve any disputes arising from it through binding arbitration governed by California law, to be conducted in San Diego County under the rules of JAMS.

16. Binding Provisions
This paragraph 16 and Paragraphs 1, 7, 8, 9, 10, 14, and 15 are binding. All other provisions are non-binding.

If you agree with the terms and conditions herein, please execute an original of this letter and return it to us. Fred, I look forward to working closely with you to finalize this Transaction.

Sincerely,

By: __________________________
Name: Ms. Wilma Lithosphere
Title: Chairman

Acknowledged and Agreed
Caveman Construction Company
By: __________________________
Name: Mr. Fred Flintshard
Title: CEO & Owner
Date: June __, 2026

Have questions about an LOI for your business? Email us.

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