The Strategic Role of Letters of Intent in M&A: Key Insights for Corporate Dealmakers

Mergers and acquisitions (M&A) are high-stakes negotiations where deal certainty, valuation, and strategic alignment must be carefully managed. Yet, before lawyers draft definitive agreements and due diligence teams dissect financials, one document often determines whether a deal moves forward: the Letter of Intent (LOI).

An LOI serves as a preliminary roadmap for an M&A transaction, outlining key terms, expectations, and the deal structure before parties commit to full-scale negotiations. While typically non-binding, certain provisions—such as exclusivity, confidentiality, and break-up fees—carry significant legal and financial weight. A poorly structured LOI can lead to prolonged negotiations, valuation disputes, or even deal collapse, making it one of the most strategic yet overlooked tools in the M&A process.

For corporate dealmakers, understanding how to draft, negotiate, and interpret LOIs is fundamental to protecting their interests and ensuring transactions reach the finish line. Let’s explore why LOIs matter, how they shape M&A deals, and what corporate buyers and sellers must consider to avoid common pitfalls.

Understanding Letters of Intent in M&A: Why They Matter Early in the Deal

In M&A, the LOI isn’t just a formality—it’s a strategic instrument that signals intent, sets negotiation boundaries, and influences transaction outcomes. But why do acquirers and sellers rely on LOIs instead of moving directly to a purchase agreement?

First, LOIs help define the contours of the deal before both parties commit extensive time and resources. At this stage, buyers and sellers negotiate fundamental terms such as:

• Purchase price and valuation methodology (e.g., enterprise value vs. EBITDA multiples).
• Payment structure (cash, stock, earnouts, or seller financing).
• Due diligence timelines and buyer access to sensitive data.
• Key closing conditions and regulatory considerations.

Without an LOI, dealmakers risk entering full negotiations without alignment on core terms, leading to wasted time and unnecessary legal fees.

Second, LOIs serve as a risk mitigation tool. Buyers often insist on exclusivity clauses to prevent the seller from seeking competing offers, while sellers use LOIs to gauge the seriousness of the buyer’s intent before disclosing sensitive financial data.

Third, an LOI sets the tone for negotiations by reducing ambiguity and minimizing last-minute renegotiations. A well-structured LOI can accelerate deal execution and reduce friction between parties, while a vague or one-sided LOI may trigger valuation disputes or cause negotiations to collapse.

Key Terms in an LOI: Balancing Binding and Non-Binding Provisions

While an LOI is often described as “non-binding,” that’s only partially true. Many LOIs contain binding provisions that can significantly impact transaction outcomes if not negotiated carefully.

One of the most critical elements of an LOI is the purchase price and deal structure. Buyers and sellers typically outline an indicative price, but the structure varies depending on whether the deal is all-cash, stock-based, or includes earnouts. Sellers prefer cash for immediate liquidity, while buyers may structure deals with stock or contingent payments to hedge risk. This is particularly relevant in industries like tech and healthcare, where valuations often depend on future performance milestones.

Another key provision is exclusivity, one of the most negotiated terms in an LOI. Buyers request exclusivity to prevent sellers from soliciting competing offers, while sellers want flexibility in case a better bid emerges. Exclusivity periods usually range from 30 to 90 days, though sellers should push for shorter windows unless the buyer demonstrates clear progress toward deal completion.

Confidentiality clauses are also critical in an LOI. These provisions ensure that deal discussions, financial disclosures, and trade secrets remain private. However, sellers should carefully assess what information is protected and whether they are allowed to share details with investment bankers or strategic advisors.

Lastly, governing law and dispute resolution clauses dictate how conflicts are handled if negotiations fall apart. Smart dealmakers specify jurisdiction, whether mediation or arbitration is required before litigation, and how legal costs will be allocated. A poorly defined dispute resolution framework can lead to prolonged legal battles, as seen in SoftBank’s dispute with WeWork over its failed $3 billion share buyout.

Negotiating an LOI: Strategies to Protect Buyer and Seller Interests

Once the letter of intent is drafted, the real work begins. While an LOI lays the groundwork for a deal, it goes beyond just outlining preliminary terms. It sets the stage for negotiations and shapes how the transaction unfolds. The strength of an LOI hinges on how effectively both parties position themselves, mitigate risks, and structure safeguards to minimize uncertainty and avoid costly disputes.

For buyers, the goal is to secure exclusivity, control deal terms, and limit exposure to post-LOI surprises. For sellers, the focus is often on maximizing price certainty, preserving optionality, and avoiding restrictive conditions that could derail the deal. Poorly negotiated LOIs often result in drawn-out due diligence, last-minute price adjustments, or, worse, an abandoned deal.

So, how do dealmakers structure LOIs that reduce friction and enhance deal certainty?

Structuring LOIs to Avoid Post-Signing Price Reductions

A common pitfall in M&A transactions is price renegotiation after due diligence uncovers risks. Buyers may argue that new findings justify adjustments, while sellers view this as bad-faith “re-trading” that erodes trust. To minimize this risk, sellers should clarify valuation assumptions upfront, preventing buyers from later claiming they misunderstood the company’s financials. Including material adverse change (MAC) clauses can also limit price renegotiation unless significant, unexpected risks emerge.

Buyers, on the other hand, often retain flexibility to adjust valuation based on due diligence findings, particularly in deals involving companies with uncertain revenue streams, regulatory exposure, or unresolved liabilities. The key is balancing flexibility with deal certainty—sellers want to avoid valuation cuts, while buyers need to account for hidden risks without being accused of shifting the goalposts.

Managing Due Diligence Timelines to Avoid Deal Fatigue

A well-crafted LOI doesn’t just outline due diligence—it sets clear expectations for process efficiency. One of the most common deal killers is deal fatigue, where prolonged diligence stalls momentum and strains relationships between the parties.

Sellers should set strict deadlines for due diligence completion to keep buyers accountable. If buyers fail to meet milestones, sellers should retain the ability to engage with other potential acquirers. Conversely, buyers should be specific about information access requirements upfront to avoid delays caused by incomplete or inconsistent disclosures. A rolling due diligence process—where major issues are addressed progressively rather than at the end—can also prevent last-minute surprises that disrupt deal execution.

A classic example of deal fatigue derailing a transaction is the failed WeWork-SoftBank deal. SoftBank withdrew its $3 billion tender offer after prolonged diligence exposed unexpected risks, reinforcing how an unstructured process can undermine buyer confidence and ultimately collapse a transaction.

Balancing Exclusivity to Protect Negotiation Leverage

Exclusivity clauses are among the most highly negotiated LOI terms. Buyers want longer exclusivity periods to lock in their position and prevent competing bids, while sellers prefer shorter terms to preserve optionality in case better offers emerge.

A well-negotiated exclusivity provision should tie exclusivity to performance milestones rather than arbitrary time limits. For example, instead of granting a 90-day exclusivity period with no conditions, sellers can require buyers to complete key due diligence steps within set intervals. This prevents buyers from using exclusivity as a stalling tactic while ensuring that serious acquirers remain engaged.

Sellers who grant long exclusivity windows without buyer commitments risk losing better offers if negotiations drag on. A prime example is Twitter’s sale to Elon Musk, where the company locked into an exclusivity agreement that prevented it from seeking alternative bidders—even as Musk later attempted to renegotiate terms.

Addressing Regulatory and Financing Conditions Early

M&A deals often stall due to regulatory approvals and financing complications, especially in cross-border transactions. While definitive agreements will contain formal regulatory approval conditions, proactively addressing these risks in the LOI can save significant time and prevent unexpected hurdles.

Sellers should demand clarity on the buyer’s financing structure—whether the purchase will be funded by existing cash reserves, debt financing, or equity commitments. Buyers should also identify potential regulatory concerns early, particularly in industries with heavy compliance oversight, such as financial services, healthcare, and telecommunications.

The failed Nvidia-Arm acquisition is a textbook case of regulatory risk derailing a deal. The transaction faced antitrust pushback across multiple jurisdictions, leading to significant delays before ultimately being abandoned. If the LOI had included clear regulatory contingencies and mitigation strategies, both parties could have set more realistic expectations from the outset.

How LOIs Influence Deal Outcomes: Common Pitfalls and Success Strategies

Even the most promising M&A transactions can unravel due to poorly structured LOIs that introduce uncertainty, misaligned expectations, or excessive complexity. The success or failure of a deal often hinges on how thoughtfully the LOI is drafted, negotiated, and executed.

The Risk of Overly Vague LOIs

One of the biggest mistakes in M&A is drafting an LOI that is too ambiguous, leaving critical issues unresolved until the definitive agreement stage. This often results in disagreements over valuation, governance, and post-close obligations.

When a Strong LOI Strengthens a Deal

A well-crafted LOI brings structure to negotiations, aligning expectations and building trust between buyers and sellers. In cases where the LOI defines valuation terms, integration strategy, and key closing conditions, deals move forward with fewer disputes and delays.

The 2020 Salesforce-Slack acquisition exemplifies this. The LOI provided detailed integration guidelines, leadership transition plans, and synergy expectations, which helped accelerate final contract negotiations and ensured a smooth post-close process.

Knowing When to Walk Away from an LOI

Not every signed LOI should proceed to a definitive agreement. Some deals fail at the LOI stage for good reason—whether due to financial red flags, valuation disputes, or regulatory pushback.

Red flags that might justify walking away post-LOI include:

• Significant discrepancies in due diligence, such as revenue inflation or hidden liabilities.
• A buyer suddenly renegotiating valuation terms without material justification.
• Regulatory pushback that fundamentally alters deal economics.

Walking away from an LOI should be done strategically. A seller exiting a deal should ensure the process does not damage its market reputation or future investor relationships. Similarly, buyers should avoid withdrawing in a way that creates litigation exposure or reputational harm in the industry.

A well-structured LOI does more than outline preliminary terms—it establishes the framework for a deal that can either move smoothly toward completion or fall apart in negotiation. When drafted with precision, it minimizes ambiguity, streamlines discussions, and helps avoid costly disputes that could derail the transaction. Buyers must ensure the LOI allows flexibility for due diligence findings without introducing unnecessary uncertainty, while sellers should focus on securing price clarity and avoiding restrictive terms that limit their options. Dealmakers who approach LOIs strategically set themselves up for more efficient negotiations, fewer roadblocks, and a higher probability of closing on favorable terms. Ultimately, an LOI isn’t just a procedural step; it’s the first real test of alignment between both parties—and how well it’s structured can determine the success of the entire transaction.