A letter of intent can shape a transaction well before the definitive agreement is signed. It establishes expectations about economics, structure, access, and timing, and may impose immediate obligations even when the parties have not agreed to complete the deal. The important question is what leadership is committing to while the most consequential facts are still being tested.
For a buyer, an LOI can justify investing in diligence and negotiation. For a seller, it can turn an expression of interest into a serious opportunity. That shared benefit depends on whether the document reflects a workable understanding of the proposed transaction.
“Nonbinding” does not describe every obligation
An LOI may leave the acquisition itself subject to further agreement while treating confidentiality, exclusivity, expenses, or other provisions as binding. Its legal effect depends on the terms, the circumstances, and applicable law. The document’s title is not a substitute for that analysis.
The Delaware Supreme Court’s decision in ev3, Inc. v. Lesh illustrates the distinction. The court addressed an LOI containing expressly binding provisions and a nonbinding funding proposal, and rejected an attempt to give that proposal binding effect through the later merger agreement.1 The lesson is that the actual commitments matter.
Leadership needs a clear understanding of which decisions remain open, which conduct is already constrained, and how the LOI relates to any existing confidentiality or other agreement. Those distinctions affect what the organization can do while it evaluates whether the proposed deal makes sense.
The price discussion may conceal different assumptions
Two parties can agree on a number while disagreeing about what it represents. One may assume that the amount includes a particular level of working capital. The other may expect to retain cash or exclude an obligation. A seller may focus on total potential consideration while the buyer expects a significant portion to depend on future results.
These differences matter before detailed drafting begins because they change the apparent attractiveness of the opportunity. A transaction with deferred payments, retained equity, or an earnout creates a different economic position from a cash payment at closing. It may also create a continuing relationship with the buyer.
An LOI cannot resolve every accounting or valuation question. It can expose the assumptions that require attention. Legal advice at this stage helps connect the proposed economics to the rights and obligations the parties expect to negotiate, with financial and tax advisers addressing their respective disciplines.
Exclusivity exchanges options for commitment
A buyer may be reluctant to invest in extensive diligence while the seller actively pursues other offers. Exclusivity can provide a protected period for that work. From the seller’s perspective, the same commitment can remove alternatives without assuring that the buyer will complete the transaction.
The tradeoff depends on more than the length of the period. The buyer’s readiness, financing assumptions, approval process, information needs, and proposed timetable affect what the seller is receiving for its commitment. An attractive indication of value carries less practical weight if the buyer still needs to resolve basic questions about its own ability to proceed.
Consider a hypothetical owner whose main objective is succession before an approaching retirement. The owner accepts an exclusivity period because the proposed buyer appears able to close promptly. The buyer later reveals that its financing and internal approval remain uncertain. The seller’s concern now includes the lost opportunity to explore a different path on the original timetable.
That does not make exclusivity inherently unfavorable. It makes it a commercial commitment worth evaluating in the context of the transaction, rather than a routine administrative term.
Structure affects what the parties are valuing
An LOI may describe an asset sale, equity purchase, merger, or another arrangement before the parties have fully explored its consequences. The proposed structure can affect tax treatment, contractual rights, liability allocation, approval requirements, and the business the buyer can actually operate.
If the deal depends on customer agreements remaining available, the parties need to understand the relationship between structure and those agreements. If the seller expects a complete exit, continuing obligations or retained interests may be central. If a nonprofit combination is involved, governance and mission commitments may deserve attention alongside financial assumptions.
Keeping a question open can be reasonable when information is incomplete. Treating a major unresolved question as settled can make later analysis look like an attempt to reopen the bargain. Counsel helps distinguish an intentional area for further work from a misunderstanding the parties have not yet recognized.
Diligence access has commercial boundaries
Detailed information can help a buyer validate an opportunity. It can also expose customer relationships, pricing, business plans, or sensitive personnel information before there is any certainty of a transaction. The seller’s other commitments and applicable law remain relevant to what can be disclosed.
Where the parties compete, the FTC identifies particular antitrust risks in sharing competitively sensitive information before closing.2 Negotiating an acquisition does not itself authorize unrestricted information exchange. A general confidentiality promise does not settle every issue about access and use.
The LOI discussion is an opportunity to recognize these boundaries before the parties build expectations around immediate access to everything. Appropriate legal involvement can support a meaningful investigation while preserving the business and relationships that will remain if the deal does not happen.
Future roles can become present negotiating pressure
An owner may expect to stay as a consultant. A buyer may expect the owner to remain responsible for customer retention. An executive may anticipate a leadership position in the combined organization. These expectations can influence enthusiasm for the transaction before the parties have agreed on authority, duration, compensation, or obligations.
The consequences extend beyond an employment discussion. Continuing responsibilities can affect whether a seller has achieved an intended exit. Management control can affect contingent payments. Individual arrangements can also create conflicts that deserve attention in the organization’s approval process.
Early clarity does not require every future agreement to be negotiated in the LOI. It requires recognizing when an assumed role is important enough to affect the decision to proceed. Otherwise, a central part of the bargain can arrive late, when both sides believe the difficult decisions have already been made.
Momentum should follow a supportable understanding
Once an LOI is signed, calendars fill, advisers begin work, and people start imagining the combined business. That investment can make changing course uncomfortable. A material diligence finding may be treated as an obstacle to the timetable instead of evidence that an original assumption needs revision.
A useful LOI creates a basis for further evaluation. It should leave leadership with a clear view of the proposed opportunity, the immediate commitments, and the issues that still determine whether a final agreement is worthwhile. Precision at this stage can preserve goodwill by reducing later surprises.
Org Law’s LOI Review & Negotiation evaluates the document in the context of the intended deal, including economics, structure, exclusivity, diligence access, and conditions. For the broader decisions that follow, see The Business Leader’s Guide to Acquisitions, Sales, and Organizational Combinations.
Sources and legal context
- ev3, Inc. v. Lesh, Delaware Supreme Court, revised April 20, 2015, pages 3–6 and 15–18. Other documents, circumstances, and governing law can produce different results.
- Federal Trade Commission, Avoiding Antitrust Pitfalls During Pre-merger Negotiations and Due Diligence, March 2018.
