Letters of Intent in M&A Transactions: Key Components for Success

In mergers and acquisitions (M&A), a Letter of Intent (LOI), also known as a term sheet, acts as a strategic roadmap that outlines the critical deal terms before both parties proceed to formal documentation and expensive due diligence. While generally non-binding (except for certain provisions), a well-drafted LOI helps both buyer and seller align on key business terms early in the M&A process, reducing risk and transaction friction.

For founders, executives, and general counsels navigating complex transactions, understanding what belongs in an LOI is essential. Below is a breakdown of the essential elements of an effective Letter of Intent in an M&A deal.

Essential Components of an Effective LOI

Party Identification

A legally sound LOI must clearly and accurately identify all parties involved using their full legal names. This includes the buyer, seller, and any other parties participating in the transaction, such as stockholder representatives, key employees, subsidiaries, or holding companies that may also be part of the deal structure. Correct party identification is critical for enforceability and to prevent ambiguity during the M&A process.

Deal Structure: Merger, Asset Sale, or Stock Purchase?

Your LOI should define the transaction structure upfront. Is the M&A deal a:

  • Stock purchase agreement (SPA)?
  • Asset acquisition?
  • Or is it a strategic acquihire, IP acquisition, or licensing arrangement?

Each M&A structure has distinct tax, legal, and operational implications that founders, stockholders, buyers and all parties must evalutate carefully. LOIs serve as the first step in determining the ideal structure based on the business goals of both parties.

Purchase Price and Payment Terms

Clearly define the purchase price and include details about the payment structure, such as:

  • Upfront payments vs. deferred installments
  • Earnouts or milestone-based compensation tied to post-closing performance
  • Escrow funds or holdbacks to cover post-closing indemnities or breaches

These payment mechanisms are key negotiation points in M&A transactions.

Indemnification Provisions

Even at the LOI stage, outline the basic indemnification framework, including:

  • Liability caps for sellers
  • Baskets (thresholds before indemnity obligations apply)
  • Survival periods for representations and warranties

Clarifying indemnity terms early signals deal maturity and helps mitigate surprises later during negotiation of the definitive agreement.

Timeline Expectations

Set realistic but firm timeline expectations for:

  • Completion of due diligence
  • Drafting and negotiation of definitive agreements
  • Pre-closing obligations and coordination
  • The target closing date

A transaction timeline in the LOI helps keep the deal on track and aligned with investor or board expectations.

Closing Conditions

Typical closing conditions in an LOI include:

  • Completion of satisfactory due diligence
  • Execution of definitive transaction documents
  • Regulatory approvals (e.g., antitrust clearance)
  • Third-party consents
  • Financing contingencies, if applicable

Setting clear conditions to close ensures both sides understand the hurdles between signing and deal completion.

Restrictive Covenants

Outline the scope of restrictive covenants that will survive post-closing:

  • Non-compete clauses: scope, geography, and duration
  • Non-solicitation agreements: employees, clients, suppliers
  • Confidentiality and publicity restrictions

These provisions protect the buyer’s interest in human capital, customers, and confidential information after closing.

General Terms and Legal Provisions

The LOI should also include the following general legal terms:

  • Governing law jurisdiction
  • Statement of confidentiality
  • Exclusivity period or “no-shop” clause (if applicable)
  • How legal expenses will be allocated
  • A clear statement of which LOI provisions are binding (e.g., confidentiality, exclusivity, governing law) and which are non-binding

These details give the LOI enforceability where needed and clarify expectations during the transaction process.

Final Thoughts: Why LOIs Matter in M&A

A comprehensive and well-structured LOI is a strategic foundation for a successful M&A deal. It provides clarity, avoids misunderstandings, and creates momentum for both parties heading into due diligence and deal execution.

Need Legal Guidance on Your M&A LOI?

Every M&A transaction has unique legal and strategic considerations. Whether you’re selling your company, acquiring a target, or navigating complex venture-backed exits, having experienced counsel draft and negotiate your LOI can make the difference between a smooth transaction and a costly misstep.

Blechynden Legal specializes in M&A for startups and venture-backed companies, corporate transactions, and general counsel services for high-growth companies and in-house teams. Contact us today for tailored advice and strategic legal support.

Disclaimer: This article is for general informational purposes only and does not constitute legal advice. No attorney-client relationship is formed by reading or interacting with this content. Always consult with a qualified attorney regarding your specific legal needs.