M&A Letters of Intent and the Terms That Bind Before Closing

By Hank FasthoffJuly 6, 2026

An M&A letter of intent (LOI) records the principal terms of a proposed acquisition before the parties negotiate the purchase agreement. Buyers and sellers commonly intend the price, structure, consideration, and closing conditions to guide negotiations without requiring either side to close. They often intend exclusivity, confidentiality, expenses, access, governing law, and dispute provisions to be binding as soon as they sign.

That division has immediate consequences. A seller may lose access to other buyers during exclusivity, and a buyer may spend substantial amounts on legal, financial, tax, and operational diligence. Both parties should know which obligations begin at signing, which terms describe the proposed transaction, and what must occur before either party has a duty to close.

Terms to Address in the LOI

Your LOI should identify the buyer, seller, target, proposed structure, purchase price, and form of consideration. It should also address the expected signing and closing schedule, diligence access, financing, required approvals, exclusivity, confidentiality, expenses, governing law, and the conditions that could end negotiations.

You should define the assumptions behind the headline price, including whether the price assumes a cash free, debt free transaction, how the parties will treat transaction expenses, and whether the price includes a working capital adjustment. If the consideration includes an earnout, seller note, escrow, holdback, or rollover equity, you should identify the principal economic terms and leave the definitive documents to supply the operating detail.

Deal structure belongs in the LOI because an asset purchase, equity purchase, and merger produce different tax consequences, consent requirements, liability exposure, and closing mechanics. You should identify the proposed structure and any expected tax elections, but you should reserve enough flexibility to address facts uncovered during tax and legal diligence.

Binding and Nonbinding Provisions

Courts examine the language and the parties' objective intent, so the title of the document has little weight. An LOI, term sheet, or memorandum of understanding can contain binding obligations, nonbinding proposals, or both. Labels help only when the operative provisions support them.

You should identify every binding section by name or section number and state that the remaining provisions describe a proposed transaction. The LOI should also provide that neither party must complete the acquisition unless the parties execute and deliver a definitive purchase agreement. If the parties intend board, member, lender, or investment committee approval as a condition, the LOI should state that requirement as well.

In Chalker Energy Partners III, LLC v. Le Norman Operating LLC, 595 S.W.3d 668 (Tex. 2020), the Texas Supreme Court enforced language providing that no transaction agreement would exist until the parties executed and delivered a definitive agreement. The parties documented proposed terms through email communications that identified assets, price, and a closing date, but the emails didn't satisfy the agreed condition to contract formation. Chalker shows why a precise no obligation provision provides better protection than phrases such as "subject to documentation" or a general statement that the parties expect to sign another agreement.

Communications after signing should follow the same structure. Draft purchase agreements, emails accepting business points, and statements that the parties have a deal can undermine the intended distinction or create a dispute over waiver. You should require any waiver or change to the no obligation provision to appear in a signed writing.

Texas and Delaware Treat Good Faith Differently

Texas law doesn't generally enforce an agreement to negotiate a future contract. In Dallas/Fort Worth International Airport Board v. Vizant Technologies, LLC, 576 S.W.3d 362 (Tex. 2019), the Texas Supreme Court held that an agreement to negotiate toward a future bargain was unenforceable even though it required a good faith effort. An agreed good faith standard may govern performance of an existing contractual obligation, but it doesn't supply the essential terms of a future bargain.

Delaware law recognizes a different rule for some preliminary agreements. In SIGA Technologies, Inc. v. PharmAthene, Inc., 67 A.3d 330 (Del. 2013), binding merger and bridge loan agreements required the parties to negotiate a license agreement in good faith according to an attached term sheet. The Delaware Supreme Court enforced that negotiation obligation and held that expectation damages could be available if the parties would have reached an agreement absent the breach and the plaintiff proved damages with reasonable certainty.

In SIGA, the binding agreements supplied the promise to negotiate in good faith according to the term sheet. The attachment identified the negotiating framework. Your governing law clause and negotiation language can therefore change both the obligation and the available remedy.

If you want either party to remain free to end negotiations, you should say so. You should reserve each party's right to stop negotiations for any reason, subject only to the provisions identified as binding. An LOI governed by Delaware law requires particular attention because language requiring negotiation in good faith within an agreed framework may impose an enforceable obligation even though neither party has agreed to close.

Exclusivity

Exclusivity prevents a seller from using a buyer's diligence period to solicit or negotiate a competing transaction. A useful provision identifies the prohibited transactions, covered sellers, representatives, and affiliates, as well as the conduct the parties intend to prohibit. That conduct may include soliciting offers, providing information, continuing existing discussions, negotiating competing proposals, or entering an agreement with another bidder.

You should match the exclusivity period to the buyer's diligence plan, financing process, and expected drafting schedule. A fixed market range can't account for the condition of the seller's records, regulatory approvals, third party consents, or the buyer's financing. Sellers should resist a period that exceeds the buyer's demonstrated needs, while buyers should avoid a deadline that expires before they can finish diligence and negotiate the purchase agreement.

Milestones can protect both sides. A seller may require the buyer to deliver a first draft of the purchase agreement, complete specified diligence, or provide financing evidence by stated dates. If the buyer misses a milestone, the seller may receive a termination right or an end to exclusivity. Any automatic extension should depend on defined progress rather than the buyer's unilateral request.

You should also address inbound offers from third parties and state whether the seller must reject them, notify the buyer, identify the bidder, or disclose the proposed terms. If the seller's board requires authority to consider another proposal, counsel should address that authority in the exclusivity provision instead of relying on an unstated fiduciary exception.

Confidentiality and Diligence Access

Many parties sign a nondisclosure agreement before the LOI. The LOI should identify that agreement, state whether it continues, and resolve any conflict between the two documents. You should also address disclosure to financing sources, equity investors, professional advisers, and other representatives who need information for the proposed transaction.

Diligence access can expose customer data, employee information, trade secrets, pricing, privileged communications, and competitively sensitive information. You should define who may receive the information, how the buyer may use it, and which contacts require the seller's approval. Competing buyers may need clean team procedures that limit access to sensitive pricing, customer, or strategy information.

Employee, customer, vendor, and lender contacts should occur only with advance coordination. Uncontrolled outreach can disrupt the business, reveal the proposed sale, or damage a relationship before the parties know whether they will close. You should also state who may make public announcements and who must respond if rumors or required disclosures arise.

Price, Working Capital, and Consideration

A price stated in the LOI should connect to the assumptions used to calculate it. For a cash free, debt free transaction, you should define the categories the parties expect to treat as cash, debt, and transaction expenses. You should also state whether the buyer expects a normalized level of working capital at closing and how the parties will establish the target.

You should include enough working capital detail to prevent the parties from discovering a different economic bargain during purchase agreement drafting, including the accounting principles, historical practices, included accounts, excluded accounts, and process for setting the target. A purchase price adjustment mechanism can wait for the definitive agreement, but the LOI should identify the intended economic treatment.

Earnouts require the same discipline. You should identify the measurement period, metric, amount, and payment ceiling, along with any operating assumptions essential to the seller's bargain. Rollover equity terms should identify the issuer, percentage or value, security class, governance expectations, transfer restrictions, and whether the seller will invest on the same economic terms as the buyer.

Diligence and Closing Conditions

The LOI should describe the principal diligence areas and the buyer's access without suggesting that diligence is complete. Buyers should preserve the right to investigate financial statements, taxes, contracts, employment, intellectual property, litigation, regulatory compliance, insurance, real estate, environmental exposure, and any industry specific risk.

Sellers should avoid an open ended obligation to satisfy the buyer in its sole discretion if the parties expect a disciplined process. You can identify required diligence, material findings, or objective conditions without committing the buyer to close. If financing is a condition, the LOI should identify it rather than leaving the seller to assume the buyer has committed funds.

Proposed closing conditions may include approval of definitive documents, completion of diligence, financing, third party consents, regulatory approvals, retention of key employees, and absence of a material adverse event. Unless the parties intend a condition to bind before the purchase agreement, you should place it within the nonbinding transaction terms.

Conduct Before Signing the Purchase Agreement

Some buyers ask the seller to operate in the ordinary course during exclusivity. A binding operating covenant can restrict hiring, compensation, capital expenditures, distributions, new contracts, or other business decisions before the buyer has committed to close. Sellers should limit any such covenant by duration, dollar thresholds, emergency exceptions, and a consent standard that protects ordinary operations.

Buyers may need protection against value leaving the business while they conduct diligence. If the parties use a binding conduct covenant, they should identify prohibited distributions, related party payments, asset sales, new debt, and unusual compensation. The provision should also state what happens if the buyer delays consent or negotiations end.

Expenses, Termination Fees, and Remedies

Most LOIs provide that each party bears its transaction expenses, including adviser fees. If one party will reimburse expenses, the binding provision should define the trigger, covered expense categories, documentation, cap, payment deadline, and exclusions. A reimbursement obligation tied to a competing sale presents different economics from one triggered whenever negotiations end.

Termination fees require analysis under the chosen law and the facts of the transaction. You should avoid importing a public company percentage into a private deal without considering the parties' anticipated loss, bargaining power, and available remedies. You should also coordinate any fee with exclusivity, injunctive relief, and expense reimbursement to prevent duplicate recovery.

Parties often acknowledge that a breach of confidentiality or exclusivity may cause harm that money alone can't repair. That language supports a request for equitable relief, but a court determines whether an injunction is available. If the parties want a contractual damages limitation, fee shifting provision, or exclusive remedy, the LOI should state it within the binding sections.

Expiration and Survival

Every LOI should state when it expires and how either party may terminate negotiations. Expiration of the nonbinding proposal may end exclusivity while confidentiality, expenses, governing law, dispute provisions, and accrued claims continue. You should identify each surviving provision and its duration.

You should coordinate termination rights with milestones and breach. A buyer may want time to cure a missed diligence or drafting milestone, while a seller may want exclusivity to end automatically. If either party may terminate on notice, the LOI should state whether termination affects an existing reimbursement obligation or claim for breach.

What You Should Negotiate

If you're the buyer, you should obtain enough exclusivity to complete diligence and drafting, define access, protect confidential information you disclose, and preserve your right to withdraw before signing the purchase agreement. You should also identify the economic assumptions behind your price so the seller can't treat a preliminary number as insulated from diligence findings.

If you're the seller, you should limit exclusivity, require buyer milestones, protect operations and sensitive information, and avoid obligations that let the buyer control the business before committing to close. You should also define the circumstances that permit you to end negotiations and return to the market.

Both sides should separate binding obligations from proposed deal terms, coordinate the LOI with the nondisclosure agreement, and make execution of the purchase agreement a condition to any duty to complete the transaction. You should preserve the value of early agreement without converting an unfinished acquisition into a lawsuit over whether the parties already made the deal.