LOI Meaning: What Founders Miss Between Indicative and Binding
A Letter of Intent occupies an unusual space in contract law. It is simultaneously a significant commitment and not quite a contract. Parts of it bind the parties legally while other parts express intentions that can change. Founders who do not understand this distinction often find themselves locked into commitments while the economics they thought were agreed remain negotiable.
The practical effect of this asymmetry is significant. A founder signs an LOI believing they have agreed to sell their company for a specific price. They stop talking to other buyers, begin preparing for due diligence, and mentally commit to the transaction. Then, weeks or months later, the buyer proposes revised terms. The founder is stuck: the exclusivity they granted is binding, the price they thought they secured is not.
Understanding what an LOI actually means, what it commits you to, and what remains open is essential for any founder entering an M&A process.
Indicative vs Binding: Understanding the Distinction
A standard LOI contains two categories of terms. The first category describes the proposed transaction: enterprise value, equity value, deal structure, working capital mechanics, earnout provisions, and similar economic terms. These are typically non-binding. The buyer is stating their current intention, not making a contractual commitment.
The second category contains operational terms: exclusivity, confidentiality, expense reimbursement, break fees, and governing law. These are typically binding. Once the LOI is signed, both parties are legally obligated to honour these provisions regardless of whether the transaction ultimately closes.
The LOI usually states explicitly which provisions are binding and which are not. Phrases like "except for the provisions of Sections X, Y, and Z, which shall be binding, the terms set forth herein are non-binding" are standard. Founders should read this language carefully and understand exactly what they are committing to before signing.
The asymmetry creates inherent risk for sellers. You commit to exclusivity, which is binding. The buyer proposes a price, which is not. The buyer can subsequently adjust the price, claiming that diligence revealed issues justifying a reduction. Your exclusivity commitment prevents you from pursuing alternatives. The structure of the document itself tilts the playing field toward the buyer.
The Binding Provisions That Matter
Exclusivity is the most consequential binding provision for most founders. It prevents the seller from soliciting, negotiating with, or providing information to any other potential buyer during a specified period. This provision exists to protect the buyer's investment in due diligence and deal pursuit. Without it, buyers risk spending time and money evaluating a company while the seller shops their offer to competitors.
Confidentiality provisions typically accompany the LOI, sometimes in a separate non-disclosure agreement. They govern what information can be shared, who can see it, and what happens to it if the deal does not close. Breaching confidentiality can expose the seller to liability even if no transaction occurs.
Break fees or expense reimbursement provisions are less common in private company transactions but do appear. These require one party to pay the other if the transaction fails to close under specified circumstances. A buyer might require a break fee if the seller accepts a competing offer during the exclusivity period. A seller might negotiate for expense reimbursement if the buyer walks away without justification.
Non-solicitation provisions sometimes appear in LOIs, preventing either party from soliciting the other's employees during and sometimes after the process. These protect the buyer from having their deal team hired away and protect the seller from losing key employees to the buyer if the transaction fails.
Why Exclusivity Has Become More Aggressive
The length of exclusivity periods has expanded significantly in recent years, shifting leverage toward buyers. According to research from Goodwin, in 2021, only about 6 per cent of deals that involved exclusivity periods had a duration of 61 days or more. By 2022, nearly 40 per cent had a duration of 61 days or more, with most having a duration of at least 76 days. Current market conditions suggest this trend is continuing.
This shift has significant implications for sellers. A 60-day exclusivity period gives buyers substantial time to conduct diligence, secure financing, and negotiate definitive documentation. A 90-day or longer period extends that timeline through a full quarter of business operations, during which performance may fluctuate, markets may shift, and the seller's leverage may erode.
Buyers have multiple reasons for seeking extended exclusivity. Uncertainty about financing availability pushes them to secure more time before committing. Complex diligence processes, especially for companies with significant regulatory exposure or operational complexity, require longer runways. And frankly, buyers benefit from the reduced competitive pressure that longer exclusivity provides.
Sellers should negotiate exclusivity carefully. Consider the minimum time reasonably necessary for the buyer to complete their work. Build in automatic termination or extension mechanisms tied to buyer milestones. Reserve the right to engage in preliminary discussions with other parties even if you cannot negotiate definitive terms. The goal is to maintain as much flexibility as possible while giving the buyer enough commitment to proceed.
Price Retrades and How They Happen
A retrade occurs when a buyer proposes to reduce the purchase price after signing an LOI. Because the price term is non-binding, the buyer is not breaching the agreement by proposing a reduction. They are simply revising their offer based on what they learned during diligence.
Some retrades are legitimate. Diligence reveals an undisclosed liability, customer concentration proves worse than represented, or financial projections prove overly optimistic. In these cases, the buyer has genuine justification for revisiting the price.
Other retrades are opportunistic. The buyer secured exclusivity, removed competitive pressure, and now exploits their leverage to extract better terms. They claim diligence findings justify a reduction, but the issues identified were known or should have been anticipated. The seller, locked into exclusivity and emotionally committed to the transaction, often accepts the reduction rather than restart the process.
BCG research shows that approximately 40 per cent of transactions take longer to close than the timeline estimated in the deal announcement, with nearly two-thirds of delayed deals requiring an additional three months or more. These extended timelines create more opportunities for circumstances to change and more pressure points for retrades.
Protecting against retrades requires both preparation and structure. Thorough pre-market diligence on your own company surfaces issues that buyers might use to justify reductions. Disclosure of known issues upfront removes the "surprise" that buyers cite to justify retrades. And negotiating shorter exclusivity with clear extension criteria maintains leverage throughout the process.
Survival and What Happens After Closing
Even after a transaction closes, founders face ongoing obligations. The representations and warranties they make in the definitive purchase agreement typically survive closing for a specified period. During that period, the buyer can bring claims if those representations prove false.
According to SRS Acquiom analysis, the median survival period has held steady at 12 months. This means sellers may have a portion of their proceeds, held in escrow, at risk for a full year after closing. If the buyer discovers misrepresentations during that period, they can claim against the escrow or, in some cases, directly against the seller.
A growing trend offers sellers an alternative. According to the same analysis, 33 per cent of 2024 deals were structured as no-survival, meaning the seller's representations do not survive closing. The buyer takes on the risk of undisclosed issues, often backed by representations and warranties insurance rather than seller indemnification.
The choice between traditional survival and no-survival structures affects the certainty of proceeds. A seller with a 12-month survival period and 10 per cent escrow knows that a portion of their money remains at risk. A seller in a no-survival deal knows they will receive their full consideration at closing, subject only to purchase price adjustments.
Understanding which structure a buyer proposes, and whether alternatives are available, should inform LOI evaluation. A higher headline price with traditional survival and significant escrow may produce lower actual proceeds than a slightly lower price in a no-survival structure.
Protecting Yourself Before You Sign
The LOI stage is where sellers have maximum leverage. Multiple buyers may be interested, competitive tension exists, and the commitment of exclusivity has not yet transferred advantage to any single party. Using this leverage effectively requires understanding what matters most.
First, minimise exclusivity duration. Propose shorter periods with clear extension criteria. If the buyer needs 90 days, understand why and whether 60 days plus a 30-day extension triggered by buyer progress might achieve the same goal while preserving your flexibility.
Second, define working capital clearly. The working capital target in the LOI becomes the baseline for closing adjustments. Ensure this number reflects your normalised operating requirements and that the calculation methodology is specified clearly enough to prevent disputes at closing.
Third, understand earnout mechanics before you agree to them. If a portion of your consideration depends on post-closing performance, know exactly how it will be measured, what control you will have over the business during the earnout period, and what happens if the buyer makes decisions that affect your ability to achieve targets.
Fourth, negotiate buyer commitments alongside your own. If you grant exclusivity, the buyer should commit to proceed in good faith, maintain adequate resources on the diligence effort, and make key decisions by specified dates. These provisions create accountability that balances the commitment you are making.
Fifth, engage experienced advisors before signing. M&A attorneys and investment bankers who have seen hundreds of LOIs know which terms are standard, which represent overreach, and where negotiation is most productive. Their perspective prevents you from accepting provisions that seem reasonable in isolation but create problems in aggregate.
If you are evaluating a Letter of Intent and want a perspective on the terms being proposed, we are happy to discuss what to look for and how to negotiate effectively.