Letters of Intent in M&A: What's Binding, What's Not, and Why the LOI Frames Every Negotiation That Follows

By Hank FasthoffJuly 6, 2026

A letter of intent in an M&A transaction is a three-to-eight-page document that outlines the proposed terms of a business acquisition before either party commits to a binding purchase agreement. Most of it isn't enforceable. And yet it's one of the most consequential documents in the deal, because the terms the parties agree to in the LOI become the baseline for every negotiation that follows.

Once a buyer and seller sign an LOI stating a $5 million purchase price, every subsequent discussion about price starts at $5 million. Once the LOI specifies an asset purchase structure, the seller's attorney must affirmatively argue for an equity structure rather than defending the status quo. Once the LOI provides the buyer 60 days of exclusivity, the seller can't shop the deal to other buyers during the most critical phase of the transaction. None of these terms may be legally binding, but all of them set anchors that shape the definitive agreement. Treating the LOI as a formality, or signing one without counsel's review because "it's nonbinding anyway," is one of the most common and expensive mistakes in private company M&A.

What Goes in an M&A LOI

An M&A letter of intent typically includes the purchase price (or a price range, or a formula for determining price), the deal structure (asset purchase, equity purchase, or merger), the form of consideration (cash, seller note, earnout, rollover equity, or a combination), key assumptions and conditions (financing contingency, due diligence contingency, landlord consent, key employee retention), the due diligence period (how long the buyer has to investigate the business before committing), the anticipated closing date, the exclusivity/no-shop period, confidentiality obligations (or a reference to an existing NDA), expense allocation, and governing law and dispute resolution.

Some LOIs also address post-closing employment or consulting arrangements for the seller, noncompete terms, indemnification and escrow expectations, and the treatment of working capital. The more detail the LOI includes on these points, the less room for negotiation in the purchase agreement, which can be either an advantage or a constraint depending on which side you're on.

Binding Versus Nonbinding Provisions

An M&A LOI is a hybrid document. Most of its provisions are nonbinding, meaning neither party is obligated to complete the transaction on those terms (or at all). But certain provisions are binding, meaning they create enforceable legal obligations from the moment the LOI is signed.

Approximately 85 percent of the typical LOI is nonbinding. Purchase price, deal structure, representations and warranties, indemnification terms, and closing conditions are typically labeled as nonbinding expressions of the parties' current intentions. Neither party is bound to consummate the transaction based on these terms. They're a framework for negotiation, not a contract of sale.

Binding provisions typically include exclusivity/no-shop, confidentiality, expense allocation, governing law, dispute resolution, and sometimes access to information and conduct of business during the exclusivity period.

Separating binding from nonbinding provisions in the LOI is essential. A well-drafted LOI includes a provision that states something like "This LOI, other than Sections 5 (Exclusivity), 6 (Confidentiality), 7 (Expenses), and 8 (Governing Law), is intended only as a summary of the terms proposed by Buyer and doesn't constitute a binding obligation of either party." Without this language, a court may interpret the entire LOI as binding, or individual provisions may be enforced that the parties intended to be nonbinding.

In SIGA Technologies, Inc. v. PharmAthene, the Delaware court found that a letter of intent attached to a merger agreement was enforceable even though it contained a footnote stating "Non-Binding Terms." Attaching the letter to the merger agreement signaled its enforceable nature. If you intend provisions to be nonbinding, say so with specificity, and don't incorporate the LOI into a binding agreement without addressing the interaction.

Exclusivity and the No-Shop Provision

Exclusivity is the most important binding provision in the LOI from the buyer's perspective. It requires the seller to negotiate only with the buyer for a specified period, typically 30 to 90 days (with 45 to 60 days being the most common range in middle-market private company transactions).

During the exclusivity period, the seller agrees not to solicit, initiate, encourage, or respond to inquiries or proposals from other potential buyers (the "no-shop" obligation). The seller also agrees to terminate any existing discussions or negotiations with other parties regarding a potential sale. Some exclusivity provisions go further and require the seller to notify the buyer if the seller receives an unsolicited approach from a third party.

Exclusivity protects the buyer's investment in due diligence. A buyer who spends $50,000 to $200,000 on legal fees, accounting fees, and consulting fees investigating the target needs assurance that the seller won't sell the business to someone else while the buyer is spending that money. Without exclusivity, the seller could use the buyer's offer as a stalking horse to attract competing bids, extract a higher price from a third party, and leave the buyer with nothing but a diligence bill.

From the seller's perspective, exclusivity is a concession. It takes the business off the market during the period when buyer interest is highest. If the buyer doesn't close (because diligence reveals problems, financing falls through, or the buyer simply changes its mind), the seller has lost weeks or months of marketing time. Sellers should negotiate the shortest exclusivity period they can get, resist automatic extensions, and include a termination trigger if the buyer fails to proceed diligently (for example, if the buyer doesn't submit a draft purchase agreement within the first 30 days of the exclusivity period).

Break-Up Fees and Expense Reimbursement

In some M&A transactions, the LOI includes a break-up fee or expense reimbursement provision that compensates one party if the deal doesn't close.

A break-up fee (or termination fee) is a fixed amount the seller pays the buyer if the seller terminates the LOI or accepts a competing offer during the exclusivity period. Break-up fees in public company transactions average 3 to 4 percent of enterprise value. In private company transactions, break-up fees are less common and, when used, are typically structured as expense reimbursement rather than a percentage of deal value.

Expense reimbursement requires the seller to reimburse the buyer's documented out-of-pocket diligence costs (legal fees, accounting fees, consulting fees) if the deal doesn't close for specified reasons, such as the seller accepting a competing offer or the seller terminating the LOI without cause. Expense reimbursement caps of $100,000 to $500,000 are common in private deals.

From the buyer's perspective, expense reimbursement reduces the cost of a failed deal and creates a financial disincentive for the seller to walk away. From the seller's perspective, agreeing to expense reimbursement is a signal of commitment, but uncapped reimbursement obligations can produce unexpected costs if the buyer's diligence expenses are higher than anticipated.

The LOI as Negotiating Anchor

Even though the nonbinding provisions of the LOI aren't enforceable, they function as powerful negotiating anchors in the purchase agreement negotiation. Once a term is stated in the LOI, the party who wants to change it bears the burden of justifying the change.

If the LOI states a $5 million purchase price and the buyer's diligence doesn't reveal any problems justifying a price reduction, the seller will hold the buyer to $5 million. If the LOI specifies that the buyer will hold back 10 percent of the purchase price in escrow for 18 months, the seller's attorney can't credibly argue for no escrow in the purchase agreement without an explanation for why the LOI term should be abandoned.

This anchoring effect is why LOI negotiations deserve the same attention as purchase agreement negotiations. A buyer who gets favorable terms in the LOI (a lower price, a larger escrow, a longer indemnification survival period) starts the purchase agreement negotiation from a stronger position. A seller who concedes too much in the LOI will spend the entire purchase agreement negotiation trying to claw back terms that were already agreed to in principle.

Good Faith and the Duty to Negotiate

Whether signing an LOI creates a duty to negotiate in good faith depends on the jurisdiction and the LOI's language.

Under Texas law, an "agreement to agree" on essential terms left to future negotiation is generally unenforceable. However, the Texas Supreme Court has recognized that an agreement to make a "good-faith effort" to reach agreement on future terms is distinguishable from an unenforceable agreement to agree and may be enforceable as a binding obligation to negotiate. If the parties fail to reach agreement despite good-faith efforts, the obligation is deemed performed and neither party is liable. But if one party breaks off negotiations in bad faith (refusing to negotiate, making unreasonable demands designed to prevent agreement, or walking away for reasons unrelated to the negotiation), the other party may have a claim for breach.

Damages for breach of a duty to negotiate in good faith are typically limited to reliance damages (out-of-pocket costs incurred in conducting due diligence and negotiations), not expectation damages (the profit the buyer expected to earn from the acquisition). This is an important limitation, because it means the injured party can recover what it spent but not what it expected to gain.

If your LOI doesn't impose a good-faith negotiation obligation, consider whether you want one. Buyers benefit from a good-faith obligation because it prevents the seller from walking away mid-negotiation without justification. Sellers benefit from the absence of such an obligation because it preserves flexibility to terminate discussions if the deal no longer serves their interests.

Common Mistakes

Signing an LOI without counsel's review because "it's nonbinding." Binding provisions like exclusivity, confidentiality, and expense reimbursement impose enforceable obligations that can cost real money.

Agreeing to an exclusivity period that's longer than necessary. A 90-day exclusivity period provides the buyer three months to control the process. If the buyer doesn't need 90 days, the seller is giving up market access for no reason.

Failing to separate binding from nonbinding provisions with specificity. If the LOI doesn't identify which provisions are binding, a court may interpret provisions as binding that the parties intended to be nonbinding.

Including too much detail on indemnification, representations, and escrow terms. These are purchase agreement issues that should be fully negotiated with the benefit of completed due diligence. Locking them into the LOI provides the buyer anchors on terms the seller hasn't had time to evaluate.

Omitting a termination provision. Every LOI should have an expiration date and a mechanism for either party to terminate if the deal isn't progressing. Without a termination provision, the exclusivity period can extend indefinitely if the buyer drags its feet.

Practical Recommendations

Negotiate the LOI with the same attention you'd give the purchase agreement. Every term you concede in the LOI becomes the starting point for the definitive agreement. Don't give away position because "we'll fix it in the purchase agreement."

Identify binding and nonbinding provisions with specificity. List the binding provisions by section number and state that everything else is nonbinding. Don't rely on a general statement that "this LOI is nonbinding" when specific provisions within it are intended to be binding.

Negotiate the shortest exclusivity period that gives the buyer enough time to complete diligence. For most middle-market private company transactions, 45 to 60 days is sufficient. Resist automatic extensions unless they're conditioned on the buyer's diligent progress.

Include a termination date and a mechanism for early termination. The LOI should expire on a stated date if a purchase agreement hasn't been signed, and either party should have the right to terminate on written notice if the other party fails to proceed in good faith.

If the LOI includes expense reimbursement, cap the reimbursable amount and limit the triggers. Expense reimbursement should apply when the seller walks away without cause or accepts a competing offer, not when the buyer's diligence reveals problems that justify terminating the deal.

Don't include a binding obligation to negotiate in good faith unless you understand the consequences. In Texas, a good-faith negotiation obligation may be enforceable, but damages for breach are limited to reliance damages, not expectation damages. If you want the flexibility to walk away without liability, don't agree to negotiate in good faith.