Getting to a Letter of Intent (LOI)

You've done the prep work, and you've presented and met with potential buyers. Now, you hope to field letters of intent (LOIs) from interested acquirers.

A letter of intent is an important step in the right direction when you're looking to sell your company and achieve an exit. But there are a variety of misconceptions about LOIs in the M&A space. So what are the most important points of the document? What do you need to know—and do—before moving forward?

In essence, an LOI is a document expressing an interest in moving to the next stage of pursuing an acquisition of your company.

An LOI is a stronger document than an IOI (indication of interest). The IOI is more like someone raising his or her hand or cold emailing you and stating that he or she might be interested in buying your company for a rough estimate or within a rough price range. The buyer probably hasn't done much homework, but if you're interested, then the person will be interested in snooping around a little more to see if it is a match. It helps the company streamline its workload, and it'll proceed only if there is a seller already interested in making a deal at an attractive price.

An IOI may come before an LOI in startup M&A, but it is not necessarily a precursor to moving into making a deal.

An LOI is not an entity or asset purchase agreement, either. These agreements are the actual legal contract that will be used to close the transaction, spelling out all of the tiny details and adjustment calculations that determine the final figures and that govern what happens in the months and years after the deal is finalized. That means escrows, warranties, employment contracts, and ongoing capitalization, resources, and performance metrics for your business in a merger, and more. This voluminous document can clearly take a lot longer to formulate, negotiate, vote on, get approved, and acquire all of the necessary signatures.

The LOI is an interim document that fills this time gap and links the buyer and you as seller together in the meantime. It also helps you both feel a lot better about sharing information and investing any more time and money working on the potential transaction.

Why an LOI Is So Important

An LOI is the first real tangible indication that a buyer may be serious and has three main roles:

  1. To lay out the rough nature and terms of the deal
  2. To identify key points and points that need to be fleshed out before closing
  3. To protect the parties involved in the process

Sharing M&A offers and potential deals with your teams, shareholders, and others carries a significant amount of risk in itself, so you want to be sure the buyer is serious and committed.

Obviously, sharing data and internal information and opening certain lines of communication with outside companies and third parties bring even more tangible risks—especially when some of them may be direct competitors or soon could be if they buy another startup in your space or decide to try to replicate your success themselves. So the LOI in an M&A situation helps protect you and minimizes your risk of loss should the deal not come to completion or the buyer and its representatives prove not to be acting in good faith.

A real LOI in this situation also lays out the general proposed terms of the offer. It is not final or binding. You can expect terms to change and be adjusted and generally not in your favor. Similar to a term sheet in fundraising mode, this document also helps to ensure that you are at least in the right ballpark in terms of price and deal structure. You do not want to waste time with a buyer who is not going to meet you where you need to be.

It should suffice to say that you do not want to jump deep into talks, share sensitive data, or discuss the costs associated without a closely aligned LOI.

Breaking Down the LOI

LOIs have a letter format and can vary in length. They can be vague or in-depth. This often depends on the size of the deal, the buyer, and how the transaction will be structured. What you negotiate as the seller is also a factor.

Following are the main sections or provisions that will be covered in most LOIs, which you should definitely go over with your corporate lawyer.


The LOI begins with a customary formal introduction of the buyer or offeror and the target company.

Overview of the Transaction

This section lays out the desired or anticipated structure and initial top-line numbers. Will it be a cash or stock deal or a mixture of both? What is the gross purchase price or amount of stock the buyer expects to pay before adjustments? Will performance-based compensation be included? What are the proposed time lines for additional payments or disbursements after closing?

Due Diligence

Most often, the LOI will contain highly generic information about the due diligence the offer is subject to. It will include all customary verifications and validations of your claims and their investment thesis, including regulations, taxes, accounting, and so on.


A legal confidentiality and nondisclosure agreement should be attached and referenced as an exhibit to the LOI. This separate legal document should detail the consequences and legal jurisdiction for any breach of confidentiality or improper use or disclosure of information obtained during talks and during the due diligence period. The information may be included as one of only two legally binding clauses in an M&A letter of intent. Note that both parties will be legally bound by this agreement and any other documents that they sign.

The Exclusivity Period

Expect the LOI to also include a requested exclusivity period and possible separate exclusivity agreement. This is the second legally binding document you may sign as part of this stage of the M&A process.

A 60- to 90-day exclusivity period is not uncommon. It may be even longer during challenging economic times, as well as during larger and more complex deals when approvals from regulators are sure to take longer. There may be provisions for an extension as well.

During this exclusivity period, you, as the seller, will be legally bound not to take other incoming bids. You will also not be allowed to shop your company.

Comparing Valuations

This is a good time to talk to your prospective buyer about how the company is valuing your business. What is it that the company really wants to buy, and why? Then, how are the buyers coming up with their price?

What is the formula or method being used for valuation? This is important to know. This information can help you gauge and foresee any fluctuations in price or payout based on these calculations. If their stock price changes, how will that change the deal? If your income goes down during the due diligence period, what is that likely to mean for the price? What if certain tax rules change before the deal is closed? This information can also help you keep your business optimized for the most important metrics for your buyer over the months ahead. (As an example, the buyer may not care about revenues, but the team wants to see active user counts growing fast.)

Measuring Suitability of the Potential Buyer

We've already covered filtering and searching for target buyers. We've gone over the ins and outs of financial and strategic buyers. We've also covered looking for positive indicators and red flag indicators in buyers through the M&A process. But at this point, it's wise to step back and assess the suitability of the buyer, before signing an LOI and launching forward.

Here are four key questions to ask when evaluating the feasibility of a buyer that has approached you with an LOI.

Can the Company Buy You?

Does this company really have the financial strength to buy you and keep your company going, if that is part of the arrangement? What factors between receiving the LOI and closing the deal may affect that ability? What about macroeconomic factors? Access to capital markets and financing? Is there anything that could substantially affect the stock price and market cap? What about regulatory issues?

Will the Company Buy You?

How likely is it that the company will really follow through on this offer or at least something close to it? How much do you trust the buyer? Does the company have a track record of successfully closing mergers and acquisitions or is this its first attempt? Are there any potential personal clashes between your shareholders or key team members and the company's executives that could derail the deal?

How much due diligence has the company done? If the buyer hasn't really dug in to get a good handle on your company, then there are countless excuses for the buyer to back out or keep dropping the price and renegotiating terms. The more due diligence the company has done up front, the less risk of the deal falling apart. You may want to encourage the company to do as much as possible (without giving up secure and sensitive data) in advance of going to an LOI.

What Will It Be Like?

What will the process of going through the M&A process be like? What will being merged and owned by this buyer be like?

Will it be enjoyable, inspiring, and empowering? Or is it going to be a living hell every single day for the next few years, followed by years of regretting the deal and its ramifications for customers and the world?

It might seem hard to determine on the surface, but you'll get a great feel for all this in your meeting with the current CEO. You can examine the company culture and fit to yours, check out the corporate reputation as an employer, and test out teams working together.

Even better, be sure to talk to other founders who have engaged in M&A talks and transactions with this buyer before—both those who were acquired and those who saw their deals fall apart before closing. What do they have to say? What tips can they offer?

How Does It Compare?

How does this buyer compare to others? How does this buyer compare to your ideal buyer choices? Not just in relation to price or terms, but for the future of your venture, the mission, process, and real match in synergies?

Hostile versus Friendly Buyers

Most entrepreneurs do not think this far ahead. Some offers and processes will be friendly, and others may be hostile. If there are inbound offers that you know will be bad for the mission, your team, customers, and your company, then there are steps you can take.

Preempting hostile takeover bids can be done through “shark-repellent” strategies that make your company unattractive to potential buyers in advance. Of course, any experienced investors you bring into your cap table who are purely focused on a financial exit may not approve these measures.

Other tactics can be used later to turn off hostile buyers from making offers. These scorched earth or poison pill strategies are designed to sabotage hostile offers. They can include defensive mergers with allies, selling off key assets, or high amounts of debt leverage at excruciatingly high interest rates.

Be aware that these strategies can also be counterproductive and self-sabotaging. You may avoid being acquired, but if you get it wrong, you could find yourself bankrupt with no appealing potential exits.

Be sure to speak with your lawyers about these issues and strategies before doing anything so that you know what's legally permissible and the liabilities of any potential approaches.

Considerations before Signing

It bears repeating that although LOIs are mostly nonbinding, they typically have provisions, clauses, and attached documents that are legally binding on you as the seller. An LOI is a step in the process of getting to a real purchase agreement, and will keep the deal moving as you work through a more detailed draft and finer negotiations. Make sure you are happy and confident in the LOI before you sign. It probably isn't going to get better or move further in your favor during the due diligence period.

In fact, although it is in the buyer's best interest to be as vague and brief as possible in the LOI, it is in your interest as the seller to make sure to glean as much detail as possible from the document. Negotiate as much as you can up front. Otherwise, the buyer will claim all of the clauses are standard. The company will want you to give up other trade-offs to get assurances or different basics you want—including everything from earnouts to employee compensation packages. Ask about how financial adjustments will be made here.

Whether you really trust the company with your data and secret sauce may come down to gut instinct. Don't ignore what your instincts tell you.

Understand your go-shop and no-shop clauses. Will you be required to solicit other bids and offers for your company? Or will you be prohibited from shopping around, auctioning, or entertaining talks and offers from other buyers, which may even be far better than the one you have now?

What happens if you sign, and then the buyer just pulls out? How much is this buyer willing to put into escrow to show that the company is really serious and committed? How much of that can you get your hands on as a breach or breakup fee to compensate you for lost time, expenses, and confidentiality?

The LOI Template

Below is a good example of an LOI. Note this is just an example, and you will need to consult with your corporate lawyer.

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