What's in an LOI
A well-drafted LOI covers all material deal terms so both parties understand what they're agreeing to before spending money on due diligence and legal fees. Key provisions:
- Purchase price and structure — Total consideration, cash at close, seller note, earnout (if any)
- Transaction structure — Asset sale vs. stock sale; which entity is being acquired
- Working capital peg — Target level and definition (or instruction to set during QoE)
- Exclusivity period — Binding; typically 45–90 days during which the seller cannot solicit other buyers
- Closing conditions — Financing, regulatory approvals, key employee agreements
- Seller obligations post-close — Transition support, non-compete, non-solicitation duration
- Break-up provisions — Who pays if the deal falls apart and under what circumstances
Binding vs. Non-Binding
Most LOI terms are explicitly non-binding — they establish intent, not obligation. But these provisions are binding:
- Exclusivity / no-shop — The seller legally cannot talk to other buyers during the exclusivity window
- Confidentiality — Both parties are bound to protect disclosed information
- Expense obligations — Who pays for what if the deal breaks
LOI and Competitive Process
In a competitive sale process, multiple buyers submit LOIs simultaneously. The seller chooses the best one — not just on price, but on certainty of close, buyer reputation, and deal terms. A well-run competitive process can generate 3–6 LOIs, giving the seller real negotiating leverage before entering exclusivity. This is one of the most important structural advantages an investment banker provides.
Typical Timeline After LOI
After LOI execution: QoE (3–6 weeks) → full due diligence (4–8 weeks) → purchase agreement drafting (2–4 weeks) → closing (1–2 weeks). Total: 10–20 weeks from LOI to close. Deals that close faster usually involve simpler businesses or experienced repeat buyers.
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