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The LOI: Why It’s More Like Dating Than a Marriage Contract

by Darren on
Perspectives

A Letter of Intent (LOI) is a non-binding document that outlines the key terms of a proposed deal — including price, structure, and timeline — but it is not a final purchase agreement. Think of it as an agreement to keep dating, not a marriage contract.

For sellers: The LOI clarifies serious interest, secures exclusivity, and sets the framework for negotiations.

For buyers: It reduces wasted effort, sets clear expectations, and protects against competing offers during due diligence.

The LOI is critical, but it’s not the finish line — it’s the starting point for deeper diligence and negotiation.

Why the LOI isn’t the Finish Line

We see it all the time: a seller receives an LOI and breathes a sigh of relief. “It’s done!” they think.

But here’s the reality: signing an LOI doesn’t mean the deal is closed. It means both parties agree to move forward in good faith. There are still due diligence, definitive agreements, financing, and numerous details to be hammered out.

If the purchase agreement is the wedding, the LOI is the promise to remain exclusive in the relationship. It signals intent, but it’s not legally binding beyond certain clauses.

Understanding what the LOI is (and isn’t) helps sellers avoid heartbreak and helps buyers protect their time and resources.

What is an LOI?

A Letter of Intent is a concise document, typically 2–5 pages, that outlines the fundamental terms of a potential transaction.

Typical contents include:

  • Purchase price (and structure: cash, earnout, seller financing).

  • Assets vs. stock purchase.

  • Timeline for due diligence and closing.

  • Exclusivity/no-shop clause.

  • Confidentiality obligations.

  • Any contingencies (financing, approvals, due diligence).

Binding vs. Non-Binding:
Most of the LOI is non-binding — meaning either party can walk away. Only specific clauses (exclusivity, confidentiality, governing law) tend to be enforceable.

Why Buyers Like the LOI

  1. Exclusivity: Buyers don’t want to invest in due diligence if the seller is still shopping around. The LOI locks in exclusivity for 30–90 days.

  2. Clarity: It sets expectations on price, structure, and deal terms before spending money on lawyers and accountants.

  3. Risk management: If diligence uncovers problems, the buyer can walk away without incurring any penalties.

Example: A buyer agrees to a $5M purchase price in an LOI, but during diligence finds overstated EBITDA. They renegotiate to $4.2M — or exit entirely.

Why Sellers Benefit from the LOI

  1. Seriousness: Receiving an LOI signals a buyer is real — not just kicking tires.

  2. Framework: It narrows the field of negotiations to key points, saving time in the long run.

  3. Exclusivity: While it prevents other buyers from shopping, it also ensures the buyer remains focused on your deal.

  4. Leverage: If negotiated well, the LOI locks in favorable structures (e.g., stock vs. asset) before details get messy.

Example: A seller prefers a stock sale for tax reasons. Getting that in the LOI helps anchor later negotiations.

LOI vs. Definitive Purchase Agreement

The LOI (lightweight):

  • Outlines key terms.

  • Mostly non-binding.

  • Signals intent.

  • Locks in exclusivity.

The Purchase Agreement (ironclad):

  • Legally binding.

  • Details reps, warranties, indemnities, and closing conditions.

  • Defines post-close obligations.

  • Survives closing.

Put simply, the LOI is the handshake; the purchase agreement is the signed marriage license.

Common Misconceptions About LOIs

  • “It’s locked in.” No — terms can and often do change in diligence.

  • “It protects me from re-trading.” Not fully — buyers can still renegotiate or walk away.

  • “It covers all details.” No — many critical terms (reps, warranties, indemnities) come later.

  • “It’s optional fluff.” Not true — a strong LOI sets the tone for a smoother deal.

Critical Guidance for Sellers

  1. Negotiate the LOI like it matters. Even if non-binding, it serves as a key anchor for the deal.

  2. Watch the exclusivity period. Too long, and you’re tied up while other buyers move on.

  3. Be specific where it counts. Spell out purchase price, structure, and type of sale (asset vs. stock).

  4. Don’t celebrate too soon. Deals fall apart between LOI and close more often than you think.

Critical Guidance for Buyers

  1. Use the LOI to identify and address deal-breakers. Taxes, structure, key liabilities.

  2. Protect your diligence investment. Exclusivity is essential.

  3. Be realistic. Overpromising in an LOI and re-trading later damages reputation.

  4. Communicate. Sellers often misinterpret silence as a sign of cold feet.

The Middle Ground: When LOIs Work Best

LOIs work best when they are:

  • Specific enough to prevent misaligned expectations.

  • Flexible enough to allow for diligence-driven adjustments.

  • Fair to both sides (reasonable exclusivity, mutual protections).

Think of it as agreeing to date exclusively: you’re committing to explore seriously, but either party can walk away if deeper issues emerge.

The Bottom Line: Don’t Confuse the LOI with the Wedding Ring

An LOI is an important milestone, but it’s not the finish line. It’s the “dating exclusively” stage of the process — a chance to explore the relationship seriously, but not a guarantee of marriage.

Sellers should use the LOI to clarify key terms and assess the buyer's seriousness, while buyers use it to protect their diligence investment. Both parties should remember that the real commitments are made later, in the purchase agreement.

At Sixty74, we value transparency in LOIs. We negotiate them carefully, but we never confuse them with the final word. That mindset protects both parties and sets the stage for smoother transitions.

If you’re interested in selling your business, let’s talk.

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