Exactly what is an LOI for a merger or acquisition?

A letter of intent (LOI) for a merger or acquisition (M&A) deal is a document that explains how one or more parties plan to go through with the deal. 

Upon receiving a letter of intent (LOI), a buyer has officially signalled their interest in proceeding with an acquisition.

Most LOIs talk about the purchase price and terms, assets and liabilities, exclusivity, and closing conditions.

Everyone in the M&A industry agrees that using a LOI is the best practice. 

It also adds clarity and transparency to the process.

Until the LOI, the process will have consisted of chats, some document sharing, and some limited exploration of the company under consideration.

The LOI opens the door to greater success. It demonstrates to the seller that the buyer is acting in good faith and has spent time negotiating the conditions of a purchase.

In a crucial way, the LOI draws a boundary:

If the terms of the LOI are acceptable to the seller, the buyer can proceed with due diligence. Negotiations on the remaining issues can begin if the terms are not accepted.

When they are solved, the LOI is “final,” both parties sign it, and due diligence can start in earnest.

Consequently, the LOI is a key point in the development of a deal.

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