Is a Letter of Intent Binding in a Business Acquisition?

A letter of intent in a business acquisition is usually described as non-binding, and that is true of the headline terms: price, structure, and the promise to close. But almost every LOI also contains provisions that bind the parties the moment they sign, and courts have enforced promises to negotiate in good faith when the document’s language supported them. So the honest answer to whether a letter of intent is binding is that parts of it are, and you choose which parts when you draft it. CLP’s mergers and acquisitions team treats the LOI as the first real negotiation rather than a formality, because the terms set here are hard to move later.

Which parts of an LOI bind the parties

A well-drafted LOI says explicitly which sections are binding. The usual list:

• Exclusivity (the no-shop). The seller agrees not to solicit or negotiate with other buyers for a defined period, typically measured in weeks and tied to diligence milestones.
• Confidentiality. Often this incorporates an NDA signed earlier; if there is no NDA, the LOI needs its own confidentiality terms.
• Expenses. Each side pays its own costs, unless the parties agree to a break-up fee or expense reimbursement if one walks away.
• Governing law and dispute resolution for the LOI itself.
• Access. The seller agrees to give the buyer access to records and people for diligence.

Everything else, including price, structure, working capital targets, and closing conditions, is normally labeled non-binding. The parties intend to be bound only by a definitive purchase agreement.

The trap is language that cuts the other way. If the LOI says the parties agree to negotiate in good faith toward a definitive agreement consistent with its terms, some courts have read that as a binding obligation and have awarded damages when one party walked away for reasons unrelated to diligence or used the LOI to re-trade terms. Delaware and New York courts have both enforced good-faith negotiation obligations in the right circumstances. Draft that sentence deliberately or leave it out.

What the non-binding terms should still cover

Non-binding does not mean vague. The LOI is the moment when the seller has the most negotiating power: the buyer is enthusiastic, has not yet spent money on diligence, and may be competing with other possible buyers. After exclusivity begins, that power shifts to the buyer. Sellers who leave key economics for the purchase agreement usually get a worse version of them.

So the LOI should state the price and how it is paid: cash at closing, seller financing, rollover equity, and any earnout, with the earnout’s metric and period at least sketched. It should state the structure, asset purchase or stock purchase, and who bears the tax cost of that choice; our asset purchase vs stock purchase post explains why this belongs in the LOI. It should say whether the price assumes a normalized level of working capital and how the adjustment will work. It should outline any escrow or holdback, the amount and the period. It should sketch the indemnification basics: survival period, cap, and basket. It should name the key employees who must sign employment or consulting agreements as a closing condition. And it should set target dates for diligence completion, signing, and closing.

An LOI that addresses these in a page or two saves weeks of purchase agreement negotiation, because counsel is documenting agreed terms rather than discovering disagreements.

Exclusivity: the clause sellers underestimate

Exclusivity is the buyer’s main ask and the seller’s main concession. During the no-shop, the seller cannot talk to anyone else, while the buyer can still walk away for any reason. That asymmetry is why the length of the exclusivity period and the conditions for extending it deserve real negotiation.

Reasonable protections for a seller include a fixed end date rather than an open-ended period, automatic termination if the buyer re-trades price without a diligence-based reason, and a requirement that the buyer deliver a draft purchase agreement by a stated date. Buyers, for their part, want the period long enough to complete diligence and financing. The steps in selling a business rarely compress below the period the buyer asks for, so sellers should negotiate the terms of the period rather than hoping it will be short.

Mistakes that show up after the LOI is signed

The first is signing a buyer’s form without counsel. Buyer forms are written to keep the economics flexible and to maximize the buyer’s options; nothing in them is neutral.

The second is leaving the structure open. A line that says structure is to be determined sounds harmless, but it allows the buyer to shift to an asset deal during diligence and hand the seller a materially larger tax bill with no corresponding price change.

The third is treating the LOI as a substitute for a purchase agreement. Some parties begin transition work, share customer introductions, or let employees learn about the sale before anything binding exists. If the deal fails, the seller has disclosed its playbook and unsettled its staff for nothing.

The fourth is ignoring the LOI’s own expiration. Many LOIs lapse automatically on a stated date. If diligence runs long and nobody extends the document, the exclusivity and good-faith provisions may have quietly ended.

Signing and what comes next

Once the LOI is signed, the buyer sends a diligence request list and the seller opens a data room. Our due diligence guide for buyers describes what that review covers. In parallel, the buyer’s counsel drafts the purchase agreement from the LOI’s terms. If the LOI was specific, the first draft should look familiar; if it was not, the first draft is where the real negotiation starts, with the seller now locked into exclusivity. Our contract drafting, review, and negotiation practice handles both the LOI and the definitive documents so the two stay consistent.

If you have received or are preparing a letter of intent for a business sale or purchase, a consultation with Capitol Law Partners can identify which terms bind you and which ones should be settled now. Schedule a consultation.

This article is for informational purposes only and does not constitute legal advice. No attorney-client relationship is formed by this communication.

Attorney Cagatay Ersoy. Practical strategy for founders, investors, and growing companies.

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