LOI stands for letter of intent, and in a company sale it is the document that turns a field of interested parties into one counterparty with a clock running. It is widely described as non-binding, which is true of the price and the structure and false of two or three clauses inside it that matter a great deal. Understanding which parts bind is most of what a first-time seller needs, and it is also the part that gets skimmed. This page sets out what an LOI does, what it costs, and what happens the day after it is signed.
The commercial terms do not bind, and that is the point
Price, structure and the treatment of working capital in an LOI are statements of intent subject to diligence. That is deliberate: neither side can commit to a price before the buyer has looked at the numbers. What the LOI does is establish the shape of the deal clearly enough that both sides can justify the cost of the diligence that follows, which is not a small cost on either side of the table.
Exclusivity does bind, and it is the expensive clause
Signing an LOI usually means agreeing not to talk to anyone else for a defined period, commonly thirty to ninety days. That is a real concession, because it removes the competitive tension that produced the price in the first place. The negotiation worth having is over its length and over what happens if diligence runs long, not over whether it exists at all.
Confidentiality and expenses usually bind too
The confidentiality provisions survive whether or not the deal completes, and each side normally agrees to bear its own costs. Occasionally a break fee appears, and where it does it deserves as much attention as the price, because it converts a walk-away into a payment. These clauses are short, they are at the back, and they are the ones a seller should read twice.
What happens the day after
Diligence starts and the request list arrives, which is where most of the elapsed time in a transaction actually goes. A seller who has spent the exclusivity period assembling answers closes faster than one who starts on receipt of the list, and the difference is measured in weeks rather than days.
Questions people ask about loi
Is an LOI legally binding?
Mostly not. Price and structure are subject to diligence; exclusivity, confidentiality and expenses usually are binding.
How long is exclusivity normally?
Commonly 30 to 90 days. The length matters more than the principle, because it is the period without competitive tension.
What comes after an LOI?
Diligence, and the request list that goes with it. That list is where most of the elapsed time in a deal is spent.