The Letter of Intent (LOI) gets underestimated far too often in M&A conversations. Maybe it’s the word “letter.” Maybe it’s the assumption that it’s non-binding. Either way, many founders, operators, and even junior deal team members treat the LOI as administrative, just a gateway to the real negotiation. But that’s exactly the trap sophisticated buyers hope sellers fall into.

In reality, the LOI is where the deal’s trajectory is often locked in. Price? Anchored. Exclusivity? Secured. Timeline? Structured. Working capital mechanics? Pre-wired. Whether you’re on the buy side trying to control the pace, or the sell side trying to preserve leverage, how you navigate the LOI phase determines more than just who signs—it shapes how the rest of the process unfolds.

This article unpacks what an LOI in M&A actually does—and how experienced dealmakers treat it not as paperwork, but as a strategic weapon.

Understanding the LOI in M&A: More Than Just a Preliminary Document

At a surface level, the LOI is simple: a written outline of the key terms and intentions behind a proposed acquisition. It’s usually non-binding, with a few exceptions like exclusivity and confidentiality. But that simplicity hides complexity, because once it’s signed, the narrative of the deal starts to crystallize.

In most M&A processes, the LOI arrives after initial outreach, NDAs, and early-stage diligence. It marks the buyer’s first formal signal that they’re serious, and it’s where headline valuation typically appears. But what’s often overlooked is that the LOI sets the tone for all downstream negotiations. Any concessions made here, intentionally or otherwise, are hard to reverse later.

Most LOIs in M&A contain several key elements:

• Purchase price (structure, form of consideration, earnouts if applicable)
• Transaction structure (asset vs. stock purchase, or merger)
• Closing conditions and expected timeline
• Exclusivity window
• Key assumptions around net working capital, debt, and cash
• Management rollover or retention concepts
• Diligence requirements and timeline

On paper, most of this looks “preliminary.” But savvy buyers use the LOI to hardwire future negotiation anchors. If you’ve agreed to a $150M headline price assuming $10M of net working capital, that number will be hard to walk back during diligence—even if you later discover the WC target was inflated.

It’s also where process control shifts. Once an LOI is signed, particularly with an exclusivity clause, the sell-side team loses its primary leverage: competition. That makes this a high-leverage moment in the transaction lifecycle. Treating it like boilerplate documentation misses the point.

Strategic Leverage: How Buyers Use the LOI to Shape the M&A Process

From the buy side, the LOI is less about outlining intentions and more about seizing control. Good acquirers use this document to box out rivals, structure diligence in their favor, and frontload negotiation wins they can enforce later. It’s not just a handshake—it’s the moment the process tilts toward execution on the buyer’s terms.

First, the LOI locks down exclusivity, typically for 30 to 90 days. That exclusivity is often binding and prevents the seller from soliciting or negotiating with other bidders. In a competitive process, this creates immediate breathing room. It also forces the seller to shift from “auction mode” to “deal mode,” usually with a single counterparty.

Second, buyers use LOIs to shape expectations. If the document outlines a price “based on the assumption of normalized working capital of $10M,” and diligence later reveals it’s only $7M, the buyer now has a justification to retrade. This isn’t a bait-and-switch—it’s calculated positioning. They’ve set the anchor.

Third, the LOI can control deal pace. By frontloading diligence items and identifying key documents in the LOI, buyers can drive momentum, or slow it intentionally if needed. It’s a subtle way of stretching the exclusivity window while preparing to renegotiate later with more leverage.

Fourth, the buyer can bake in structural preferences—like asset purchases vs. equity deals, or escrows and earnouts. If these get tentatively agreed to in the LOI, it’s much harder for the seller to push back later without risking the buyer walking away. One sponsor we spoke with refers to the LOI as “the moment we lock in 60% of the deal economics—before the lawyers ever show up.”

In more advanced cases, buyers also use LOIs to insert behavioral terms: defining management expectations, retention language, or even early-stage equity incentive frameworks for post-close plans. While these aren’t binding, they start to shape seller psychology, getting founders emotionally bought in before the real documentation process even begins.

For sophisticated buyers, the LOI isn’t a placeholder. It’s a tactical map for how they want the rest of the deal to unfold—and how they’ll maintain momentum and leverage through closing.

Seller Considerations: What to Watch Before Signing an M&A Letter of Intent

For founders and management teams, signing an LOI often feels like progress, and on paper, it is. But it’s also where leverage begins to erode. Once exclusivity kicks in, the buyer holds more cards, and the sell-side loses optionality. That’s why seasoned advisors treat the LOI not as a milestone to race toward, but as a critical point of negotiation.

The first and most obvious watch-out is exclusivity creep. Many sellers assume exclusivity simply prevents them from shopping the deal around. But some buyers push for broader terms—restricting even informal discussions with other parties, extending the window unilaterally, or tying it to diligence completion rather than calendar days. That creates soft traps where sellers are locked in without clear exits.

Second, sellers need to scrutinize the working capital and net debt assumptions. These numbers look harmless in an LOI, but they often set the targets that define price adjustments later. If a seller agrees to a $10M working capital peg but historically runs at $8M, they’ve effectively conceded $2M in purchase price, without realizing it. Smart sell-side advisors always benchmark these terms against audited trends before finalizing the LOI.

Third, be cautious around earnout language. Some buyers use the LOI to casually insert performance-based consideration, capped, of course, and often vague. While these earnouts aren’t binding in the LOI phase, their inclusion signals future negotiation friction. Worse, they can anchor the founder’s psychology around upside that may never materialize.

Here’s a focused list of LOI red flags sellers should pressure-test before signing:

• Working capital targets set above recent historical averages
• Broad exclusivity language with unclear duration or auto-renewal
• Earnout structures introduced without clear KPIs or timing
• Vague language around post-close employment or equity retention
• Assumptions that price is “subject to confirmatory diligence” without thresholds

It’s also worth pushing for clarity on timeline and deliverables. A tight exclusivity window with no clear diligence expectations puts sellers in a defensive position. Best practice is to define what materials the buyer needs, by when, and to tie key milestones to mutual progress, not just buyer discretion.

Finally, sellers shouldn’t underestimate the signaling power of signing an LOI. Internally, it can trigger employee anxiety, distract leadership, or prematurely shift focus away from operations. Externally, it can leak into the market, especially in industries where deals are relationship-driven. If the deal falls apart after LOI, the reputational hangover can hurt future processes.

For sellers, signing the LOI is the moment the real negotiation begins. Giving away too much early—even if non-binding—can box the deal into a structure that’s hard to unwind later.

From LOI to Definitive Agreement: Managing Risk and Momentum Through the Transition

Once the LOI is signed, the clock starts ticking. For both sides, the transition from signed intent to signed agreement is where most deals either move efficiently, or start bleeding momentum. The key? Preserving deal logic while staying disciplined around risk.

For buy-side teams, this phase is about validating assumptions without overreaching. The LOI often outlines a path to closing—valuation, timing, terms—but diligence is where those assumptions meet reality. If material issues emerge, the instinct is to retrade. But pushing too hard can kill momentum, especially if the seller feels blindsided.

That’s why the strongest deal teams manage post-LOI conversations carefully. They flag issues early, document diligence findings clearly, and loop in advisors with enough foresight to propose solutions rather than just escalate concerns. A retrade on price may be warranted, but a creative structuring change or earnout tweak often gets the deal over the line without poisoning the relationship.

Sellers, meanwhile, need to stay alert. Too many teams assume that once the LOI is signed, the deal is “done.” It’s not. This phase is where many acquirers introduce friction: new diligence asks, timeline shifts, legal pushback, or renegotiated language. The best sellers keep their operating tempo high, hold regular cross-functional calls with counsel and bankers, and treat every post-LOI interaction as an audition for the final SPA.

There’s also a real art to managing internal momentum. Deals often stall because teams lose steam, miss deadlines, or get distracted. Strong buyers run post-LOI like an M&A sprint—tight comms, tracked deliverables, clean handoffs between legal, finance, and ops. Weak buyers go silent, miss diligence asks, or toggle priorities. That’s where trust erodes.

Key transition risk points from LOI to SPA include:

• Unclear responsibilities for diligence document delivery
• Failure to escalate emerging issues early (e.g., tax, IP, HR risk)
• Legal teams redlining documents without commercial context
• Founder fatigue—where sellers lose emotional commitment mid-deal
• Timeline drift without accountability from either side

Institutional dealmakers know this: if the post-LOI period takes more than 90 days without a definitive agreement in sight, odds of closing drop sharply. Not because of any one issue, but because uncertainty metastasizes.

Both sides benefit from clear choreography: week-by-week check-ins, rapid escalation protocols, and clear “go/no-go” checkpoints to keep everyone aligned. That way, when the definitive agreement finally lands, it’s not a surprise—it’s a logical next step in a well-managed process.

The LOI may not be legally binding (in most respects), but in M&A, it’s where leverage gets locked, expectations get framed, and momentum either builds or dies. Sophisticated deal teams treat it as the deal’s strategic blueprint—not just a formality. For buyers, it’s a chance to frame valuation, control pacing, and box out competitors. For sellers, it’s the last window to preserve optionality, test partner dynamics, and protect against overcommitment. The smartest players know that what happens at LOI doesn’t stay there—it echoes all the way through the close. And in tight, competitive deal cycles, mastering the LOI stage can be the difference between a clean win and a drawn-out fumble.