Glossary
Glossary
A Letter of Intent (LOI) is a non-binding document submitted by a prospective buyer that outlines the key terms under which they propose to acquire a target company — including purchase price, deal structure, exclusivity, and the conditions that must be met before a definitive agreement is signed. The LOI marks the transition from exploratory discussion to active deal negotiation, and represents the point at which both parties have reached sufficient alignment to commit resources to the next stage of the process.
The LOI serves a specific and practical function at a pivotal moment in the deal process. Before it is signed, the buyer is evaluating and the seller is considering. After it is signed, both parties have made a visible commitment to work toward close. That shift changes the dynamic of every subsequent conversation.
More concretely, the LOI forces both parties to articulate and agree on the most important commercial terms before either side invests the time and cost of full legal documentation. A purchase agreement in a mid-market transaction can run to hundreds of pages and take weeks of legal time to negotiate. Discovering at that stage that the parties had fundamentally different assumptions about price, structure, or indemnification is an expensive way to find out the deal was never real.
By surfacing and resolving the major commercial issues upfront — in a short, relatively plain-language document — the LOI substantially reduces the risk of a late-stage breakdown. It also establishes the negotiating precedents that will carry forward into the definitive agreement: terms agreed in the LOI are very difficult to reopen later without damaging the relationship and deal momentum.
LOIs vary in length and detail, but most cover the same core commercial elements:
Purchase price and structure: The headline consideration — cash at close, stock, seller financing, or a combination — and the enterprise or equity value basis on which it is calculated. Any reference to a working capital adjustment mechanism is typically included here, even if the specific methodology is negotiated later.
Transaction structure: Whether the deal will be structured as a stock purchase, asset purchase, or merger — a choice with significant tax, liability, and operational implications for both parties that is better established early than left ambiguous.
Earnout provisions: If any portion of the consideration is contingent on post-close performance, the LOI will outline the basic earnout structure: the metric being measured, the timeframe, and the potential additional consideration. Earnout terms are among the most negotiated elements in mid-market deals and benefit from being framed clearly before exclusivity begins.
Conditions to close: Any material conditions that must be satisfied before the transaction can complete — regulatory approvals, third-party consents, financing conditions, or the resolution of specific diligence findings that are already known at LOI stage.
Exclusivity: The period during which the seller agrees not to solicit or engage with other potential buyers — typically 30 to 60 days — giving the acquirer runway to complete diligence and finalize the purchase agreement without competitive pressure. Exclusivity is one of the most strategically significant provisions in the LOI for the buyer, and among the most carefully negotiated for the seller.
Representations and warranties framework: High-level parameters around the scope and survival period of seller representations and the indemnification structure. The LOI rarely specifies every rep and warranty, but establishing the framework early reduces the risk of a late-stage impasse on risk allocation.
Confidentiality: Provisions governing how the LOI itself and the information exchanged during the process are treated by both parties.
Expected timeline: Indicative milestones for diligence completion, purchase agreement negotiation, and close, giving both parties a shared framework for managing what remains.
In practice the terms are often used interchangeably, and the structural difference is more semantic than commercial. Both are non-binding documents that outline proposed deal terms before the definitive agreement is drafted.
Where a distinction is drawn, it typically reflects format and emphasis. A term sheet tends to be more concise, presenting the key commercial terms in a summary table or bullet format without extensive prose. An LOI is typically more formal and comprehensive, closer in structure to a short purchase agreement, with fuller recitals and more developed language around process and exclusivity.
Some practitioners use LOI specifically in the context of an offer being made to a seller in a negotiated deal, and term sheet in the context of a document being exchanged between parties who are already broadly aligned. In competitive auction processes, sellers' advisors often request formal LOIs from shortlisted buyers because the more developed format signals deal seriousness and provides more complete commercial terms to compare across bidders.
What matters in practice is less the label and more the content: does the document clearly articulate the commercial terms both parties are committing to negotiate toward, and does it include a binding exclusivity provision that protects the buyer's investment in the process that follows?
Certain LOI provisions generate consistent negotiating friction regardless of deal type or size.
Purchase price and working capital pegThe headline number attracts the most attention, but the working capital mechanism — how the final price adjusts based on actual working capital delivered at close versus a normalized target — can move the effective consideration by a meaningful amount in either direction. Sellers frequently underestimate the significance of working capital negotiations at LOI stage; experienced buyers do not.
Exclusivity period lengthSellers want exclusivity to be as short as possible, limiting the time they are off the market without certainty of close. Buyers want enough runway to complete diligence and negotiate a complex definitive agreement without artificial time pressure. Thirty to sixty days is typical; large or complex transactions sometimes require more, and sellers sometimes push for milestone-based exclusivity extensions rather than a fixed period.
Earnout structureWhen part of the consideration is contingent on future performance, both parties have structurally different incentives. The seller wants a metric that is clearly measurable, achievable, and not easily manipulated by post-close operational decisions made by the new owner. The buyer wants an earnout that reflects genuine value creation and protects against overpayment for performance that does not materialize. The metric, measurement period, and any post-close operating covenants are all points of real tension.
Indemnification parametersThe cap, basket, and survival period for post-close indemnification claims directly affect how much risk the seller retains after close. These terms are rarely agreed on the first exchange and often require advisor intervention to bridge, which is why establishing at least a framework in the LOI is preferable to leaving them entirely to the purchase agreement negotiation.
Before. The LOI is the moment of highest negotiating leverage for the buyer, and the most important moment to resolve the commercial issues that will be hardest to reopen later.
Before the LOI is signed and exclusivity is granted, the seller still perceives competitive risk. They do not know with certainty that the buyer will commit, and they have not yet taken the business off the market. That uncertainty is leverage. A buyer who uses this window to anchor on the terms that matter most — price, structure, exclusivity length, indemnification framework — and moves with speed and decisiveness after management presentations, consistently achieves better terms than one who deliberates or defers the hard conversations.
After exclusivity is signed, leverage shifts toward the seller. The buyer has committed to a period off-market, has invested in diligence, and faces the real cost of walking away. Re-opening LOI terms post-exclusivity — except on the basis of material diligence findings — damages trust, signals bad faith, and frequently derails deals that were otherwise executable.
The discipline is straightforward: treat the LOI as the first draft of the deal, not a preliminary courtesy, and negotiate it accordingly.
The LOI is the point of highest negotiating leverage for the buyer and the most important moment to resolve the commercial issues that, if left ambiguous, will generate friction and cost in the definitive agreement negotiation that follows.
Midaxo tracks deal stage progression, carrying full deal context forward from pipeline into diligence and close without the handoff failures that typically occur when teams move between disconnected tools.