Letter of Intent: The Step Before the Contract

Before the lawyers draft the final contract, most serious business deals pass through a letter of intent. An LOI sets out the framework of the deal — the proposed price, the structure, the timeline for due diligence, and the conditions for closing — so both sides negotiate from the same page instead of discovering deal-breakers after weeks of legal bills.

Here is the part most people misunderstand: a letter of intent is generally not legally binding. The commercial terms — price, structure, closing date — stay open until the definitive agreement is signed. But there is a trap: if the LOI is written in definitive language with all essential terms settled, a court may find it created binding obligations anyway. So the document must clearly state what binds and what does not. The safest approach is to spell out, in plain language, that the deal terms are non-binding.

The exception is a handful of protective clauses written to bind both sides from the moment of signing. Confidentiality: the other side cannot use your financials, customer lists, or trade secrets if the deal collapses. Exclusivity — the 'no-shop' clause: the seller stops shopping the deal to other buyers while you spend time and money on due diligence. Costs: who pays advisor fees if the deal dies. Plus governing law and an expiry date, so the LOI ends automatically if no final agreement is reached in time.

LOIs are used for business purchases, commercial leases, partnerships, and joint ventures — anywhere both sides want alignment before committing to full legal costs. Treat the binding clauses with the same care as the final contract, because on those points, they are the final contract.

A few practical notes. An LOI is usually drafted by the buyer, but both sides should review it carefully — sellers in particular should watch the exclusivity clause, since it takes the deal off the market for a defined period. Keep the timeline realistic: 30 to 60 days for due diligence is typical for small business deals, longer for complex ones. Some LOIs include a break-up fee, paid by one side if it walks away without cause, though this is more common in larger transactions. And remember what an LOI is not: it is not a substitute for the final agreement, and it should never contain so much definitive language that a court could mistake it for one. When in doubt, the words 'non-binding' should appear in the document itself, not just in your head.

Our free letter of intent generator drafts an LOI with clear binding and non-binding sections, so both sides know exactly where they stand from day one. Start the deal right.