Letter of Intent in M&A: What It Really Decides Before the Deal Is Done

Updated: April 2026  |  Next review: November 2026

I have watched deals fall apart in the SPA phase over disagreements that were already present at the term-sheet stage. Nobody flagged them. Both sides assumed the other had the same thing in mind. By the time it became clear they did not, due diligence was running, advisors were billing, and neither party could back down without losing face. According to Datasite's M&A market analysis, over 40% of deal failures during due diligence trace back to commercial misalignments never resolved at the term-sheet stage. That number does not surprise me.

The Letter of Intent (LoI), also called a Head of Terms or Term Sheet, tends to get treated as a formality. A preliminary document. Something you sign before the real work begins. That framing is wrong, and it costs clients money. The LoI is where the deal is actually structured. Everything that comes after either confirms what the LoI established, or fights about what it left open.

This article covers what the LoI actually decides, which provisions need to be binding even when the document formally is not, and where sellers and buyers consistently make avoidable mistakes.

What Is a Letter of Intent in M&A?

The simplest way I can put it: the LoI is a structural survey, not a purchase. When you are buying a building, you commission a survey before you agree the final price. The survey does not give you ownership. It tells you whether the deal you think you are making is the deal that actually exists. The LoI does the same thing in M&A transactions. It tests reality before you commit to it.

A properly drafted LoI addresses:

• the transaction structure: share deal, asset deal, merger, or a multi-step restructuring,
• the purchase price and exactly how it will be calculated and paid,
• key conditions precedent: regulatory approvals, financing, third-party consents,
• timeline for due diligence and signing,
• exclusivity and confidentiality,
• who pays for what if the deal does not close.

The LoI defines the framework that the Share Purchase Agreement is supposed to reflect. Without that framework, due diligence is a process with no agreed destination. Both parties are spending time and money moving toward a closing that may look completely different to each of them.

The Real Risk: Misaligned Expectations

Here is what actually happens in most failed deals. The parties meet, they like each other, and there is a genuine appetite to transact. They sign a Letter of Intent that both sides read as confirming agreement.

Then, due diligence starts. And somewhere between week three and week eight, it becomes clear that one party assumed the price was fixed and the other assumed it would be adjusted at closing. Or one side assumed the seller would stay on for two years post-closing, and on the other assumed handover would take three months.

Neither party was lying. Neither was acting in bad faith. They simply never made their assumptions explicit. The LoI let them move forward without doing so.

In my practice, the four assumptions that cause the most damage when left unstated are:

1. whether the price is fixed or subject to post-closing adjustment;
2. whether a locked-box or completion accounts mechanism applies;
3. whether part of the consideration is deferred or performance-contingent; and
4. what the seller's post-closing role actually looks like.

These are not edge cases. They are the core commercial questions of almost every deal.

When these surface late, everything is harder. Due diligence is running. The buyer's financing is tied to specific terms. Both sides have told their boards that this deal is happening. Renegotiating at that point is painful in a way that earlier negotiation never would have been.

Is a Letter of Intent Legally Binding?

No, except for the parts that are.

This is where clients often get confused. The standard position is that a Letter of Intent is not legally binding, except for certain specific clauses. What that means in practice is that neither party is contractually committed to complete the transaction. But certain obligations do attach from the moment of signing: confidentiality, exclusivity where granted, cost allocation, and governing law.

Exclusivity is what matters most for sellers. The moment you grant exclusivity, you have removed your most powerful negotiating tool: the ability to walk into the next conversation with a credible alternative buyer. You have given the buyer a defined window to complete their process without competition. That is worth something. Make sure you are getting something clear and valuable in return before you give it away.

The other thing people underestimate is commercial momentum. A LoI that is formally non-binding still changes the situation materially. Once it is signed, your board expects the deal to happen. Your management team starts planning around it. The buyer's financing team starts moving. Walking away becomes costly in ways that have nothing to do with legal obligations. So "non-binding" is not the same as "consequence-free."

What the Letter of Intent Must Address

The hardest thing about drafting a Letter of Intent is calibrating how much detail is enough. Too vague, and you have not actually agreed on anything useful. Too detailed, and you are drafting a preliminary SPA, which adds time, cost, and the risk that you negotiate the same issues twice.

Three areas require genuine conceptual agreement at the LoI stage. Everything else can wait for the SPA.

Transaction structure

A share deal, asset deal, merger, and multi-step restructuring are not interchangeable options. Each has completely different implications for tax, liability, regulatory approvals, and employees. If you proceed through due diligence without agreeing on which structure you are doing, you may find that months of work was done under assumptions that no longer hold. I have seen this happen. It is expensive and entirely preventable.

The plain version: agreeing on a price without agreeing on what is actually being sold is not an agreement. It is a deferred argument. For a detailed comparison of transaction structures, our analysis of asset deal vs share deal in Serbia covers the key distinctions.

Purchase price mechanism

Agreeing on a valuation is not the same as agreeing on a price. You also need to agree on how that price will be calculated and paid.

Locked-box means the price is fixed as of a reference date and does not adjust at closing. Completion accounts means the price adjusts based on the actual financial position when the deal closes. These produce different outcomes. In a completion accounts deal, the working capital position at closing affects the final number. Changes in receivables, payables, inventory, and debt between signing and closing can move the price materially. A seller who agrees to a completion accounts mechanism without understanding it has effectively agreed to a price they have not yet seen.

The plain version: the headline number in the LoI and the wire transfer at closing are not necessarily the same figure. Your LoI should make clear which one you have agreed.

Conditions precedent

These are the things that have to happen before the deal can close: merger control clearance, regulatory approvals, financing, third-party consents. Knowing what they are early matters. A condition that surfaces after months of due diligence, a consent that a key customer declines to give, a notification obligation that triggers a three-month waiting period, can unwind substantial preparation at substantial cost.

The plain version: find out what needs to happen for the deal to close before you start spending money on professional fees.

How the Letter of Intent Works Across Different M&A Contexts

The LoI does not work the same way in every deal. The right level of detail, and what needs to be resolved upfront, depends heavily on the deal context.

Bilateral negotiations

Most mid-market deals are bilateral. Buyer and seller sit across the table without a structured process around them. The flexibility is real. So is the risk. Without competitive pressure, both parties are tempted to defer the hard questions. It feels friendlier. You are building the relationship. Why introduce friction now?

Because the friction is not going away. It is just moving to a later stage where it costs more and damages more. In bilateral deals, the LoI is the mechanism that forces the difficult conversation to happen at the right moment, before anyone is too committed to have it honestly.

Cross-border transactions

Add a border to the transaction and you add a layer of complexity that makes early clarity even more valuable. Different governing law, different regulatory regimes, currency exposure, tax structuring requirements, approval timelines that vary by jurisdiction. Any of these can affect deal feasibility. Identifying them conceptually in the LoI gives advisors in different jurisdictions something concrete to work from, rather than coordinating across borders on undefined terms.

Private equity transactions

Financial sponsors do not approach deals informally. They come with defined investment models, return thresholds, and structural requirements. Financing conditions, management rollover, equity incentive structures, and exit mechanics are not afterthoughts in a PE deal: they are central to why the economics work. Ambiguity on any of these at the LoI stage tends to create friction during SPA negotiations that is disproportionate to what should be a fixable issue.

Strategic buyers

Strategic buyers are thinking about the business they will own after closing, not just the financial return. That changes what the LoI needs to address. Integration planning, transitional arrangements, which employees stay and on what terms, what governance looks like in the first year post-closing. These questions matter as much as price to a strategic buyer, and an LoI that ignores them is not fully reflecting the deal.

Competitive auction processes

In an auction, the LoI is a bid. Buyers are being compared not just on valuation but on how credible and certain their offer looks. Low conditionality, clear financing, limited post-signing price adjustment risk: these signal that a buyer can actually execute. A vague or heavily conditional LoI in a competitive process tells the seller this buyer is going to be difficult. Even if the headline number is good, that signal matters.

Practical Example: What Happens Without Clear LoI Terms

A mid-market software company. Buyer and seller agree on a headline enterprise value of EUR 12 million, debt-free, cash-free. Both parties are satisfied. Advisors are instructed. Due diligence begins.

Six weeks in, the buyer's financial advisors flag that the seller has been capitalising certain software development costs. From the seller's perspective, this is standard practice, consistent with how they have always reported and entirely defensible. From the buyer's perspective, it is a debt-like item under the completion accounts mechanism and should reduce the price. Both positions have logic behind them.

The LoI said "debt-free, cash-free basis." It did not define what qualified as a debt-like item. It did not specify which accounting standards would apply to the completion accounts. Nobody thought to put that in, because both sides assumed the other would interpret it the same way they did.

Five weeks of additional negotiation. Significant additional advisory fees. A EUR 900,000 price reduction. A relationship between buyer and seller that never fully recovered from the suspicion that someone had been playing games. The deal completed. A lot of similar situations do not.

This is not an unusual story. In mid-market M&A, it is a common one.

Strategic Considerations for Sellers

For founders and majority shareholders, especially those doing this for the first time, the LoI stage often arrives before they fully understand what they are committing to. The discussions have been friendly. The buyer seems serious. There is momentum. Signing feels like a natural next step.

It is. But what you sign matters enormously.

The biggest decision at this stage is exclusivity. Once you grant it, the competitive tension that has been shaping negotiations disappears. You owe it to yourself to make sure that before exclusivity kicks in, the price mechanism is clearly defined, the timeline is realistic, and the scope of disclosure is agreed. Vague exclusivity with open-ended terms is not a favour to either party. It is an invitation to a long and expensive negotiation with no clear endpoint.

Earn-outs are the other area that causes consistent problems when left vague at the LoI stage. They can bridge a valuation gap, which is a legitimate function. But they only work if the fundamental mechanics are agreed upfront: how performance is measured, over what period, according to which accounting principles, and who controls the business decisions that affect the metrics during the earn-out period. Parties who treat earn-out as a detail to sort out in the SPA consistently find it becomes the most contested part of the whole negotiation. For more context on how valuation interacts with deal structure, our analysis of EBITDA in M&A transactions is a useful starting point.

One more thing worth saying directly: if the LoI negotiations reveal that the buyer's expectations on valuation or risk allocation are fundamentally incompatible with yours, pay attention to that signal. The LoI stage is the cheapest point at which to discover a deal is not viable. The SPA stage is not.

Strategic Considerations for Buyers

Buyers often underuse the LoI as a tool for documenting their own assumptions. This is a mistake. The assumptions that drive your valuation, what you believe about financial performance, debt levels, regulatory position, key contracts, should be recorded somewhere that both parties have acknowledged. The LoI is the natural place to do that.

When discrepancies emerge during due diligence, and they almost always do, the conversation is much more manageable if there is a documented baseline to return to. Without it, every finding opens into a broader renegotiation. Fees increase. Trust deteriorates. The process that was meant to confirm the deal starts to feel like it is unravelling it.

There is also a self-interest argument for presenting a fair LoI. A buyer whose document is excessively one-sided, or that leaves core economic questions deliberately open, signals to the seller that the buyer either does not know what they want or is planning to renegotiate later. Sellers respond predictably: they slow disclosure, keep alternative conversations alive, and approach the SPA with their guard up. The process becomes adversarial at exactly the moment when it should be cooperative.

A balanced LoI, one that reflects what you actually intend to do and documents the assumptions you are actually relying on, produces better due diligence and a better SPA process. This is not idealism. It is the practical experience of what well-run transactions look like.

Preparation Before Signing a Letter of Intent

The sellers I see in the strongest position during M&A negotiations are almost always the ones who did their own homework first.

Before you sign a Letter of Intent, run a basic internal due diligence on your own business. Review your key contracts. Check your corporate records. Understand your employment arrangements and any pending regulatory issues. Not to the level of detail the buyer's team will go to, but enough to know what they are going to find.

Here is why this matters: a weakness discovered during your own preparation, before the LoI is signed, is a negotiating variable. You can address it, disclose it proactively, or price it in. The same weakness discovered by the buyer's advisors six weeks into due diligence is a problem. The price has been agreed. Positions are set. The buyer's team uses the finding as leverage, and they are right to do so, because you knew and did not say.

Engaging legal, financial, and tax advisors before the LoI is signed also helps you understand whether the deal being proposed is actually the deal you want to do. LoI terms that seem reasonable in a first reading often look different when someone who does this for a living reviews them.

The Letter of Intent as a Process Management Tool

A signed LoI is not just a statement of commercial intent. It is a working document for everyone involved in executing the transaction.

Legal advisors use it as the reference point for SPA drafting. Financial and tax advisors use it to structure their workstreams. Management teams on both sides use it to understand what has been agreed and what still needs to be negotiated. A clear LoI allows all of this to happen in parallel. A vague one forces everyone to work from different interpretations, which eventually collide.

The other thing a well-structured LoI does is give both sides a clear signal when something has gone wrong. If SPA negotiations begin producing positions that bear no relation to what was agreed in the LoI, that is not a drafting problem. It is a commercial problem, and it needs to be addressed at the principal level, not resolved through clever drafting. The LoI is the reference point that makes that conversation possible.

When the Letter of Intent Stage Signals a Deal Should Not Continue

Not every deal should close. That sounds obvious, but it is easy to forget when both sides are invested in making something happen.

By the time a Letter of Intent is being negotiated, both parties have spent time and some reputational capital. That creates pressure to reach agreement, even when the terms on the table are not good enough. The investment already made becomes a reason to keep going, which is exactly backwards. The right question is not how much you have already spent. It is whether the terms being discussed represent a deal you would choose to do today, knowing what you know.

If the LoI negotiations reveal that valuations cannot be reconciled on a rational basis, that the proposed risk allocation is not commercially acceptable, or that structural or regulatory constraints create genuine uncertainty about whether the deal can close, then stopping at this stage is the right decision. It is far less expensive than stopping after three months of due diligence. And it is far less damaging to the business than completing a transaction on terms that were wrong from the start.

The ability to disengage at the LoI stage is one of the practical advantages of treating the LoI seriously. Parties who treat it as a formality tend to stay in bad deals too long.

Common Disputes That Originate from Poorly Drafted Letters of Intent

After years of advising on M&A transactions, the disputes that reach me in the SPA phase have a recognisable pattern. They almost always trace back to something that was left undefined at the LoI stage.

Price adjustment disputes are the most frequent. The LoI says "debt-free, cash-free basis." The SPA negotiations reveal that the parties have entirely different views on what constitutes a debt-like item, what working capital methodology applies, and which accounting standards govern the completion accounts. Neither side was unreasonable. Nobody defined the terms. The argument was always there, waiting to be had.

Earn-out disputes follow the same pattern. "Additional consideration payable based on future performance" sounds like agreement. It is not. It is a placeholder for a conversation that still needs to happen about governance, accounting, measurement periods, and what happens when the buyer makes decisions that affect the earn-out metrics. When those conversations happen in the SPA phase rather than the LoI phase, they are harder, more expensive, and more adversarial.

Exclusivity without milestones or a long-stop date is the third recurring problem. Sellers grant exclusivity, then watch weeks become months with no clear progress and no clear right to walk away. The buyer is not necessarily acting in bad faith. The LoI just never defined what would happen if timelines slipped.

The common thread: a Letter of Intent is not a summary of good intentions. It is a risk allocation instrument. Whatever it leaves undefined will be argued about later, at higher cost, under greater pressure, with more to lose.

Frequently Asked Questions

Is a Letter of Intent the same as a Term Sheet?

Yes, in most M&A contexts. Both are preliminary documents recording the principal commercial terms agreed before the definitive agreement is drafted. Some practitioners use "Term Sheet" to suggest a shorter, more summary document, while "Letter of Intent" or "Head of Terms" implies more detail. The distinction is conventional, not legal.

Can a seller negotiate a Letter of Intent without legal advisors?

Technically yes. In practice, sellers who approach the LoI stage without legal or financial advisors regularly agree to terms that are structurally disadvantageous, and then find those terms very difficult to revise once the SPA process is underway. The advisory cost at the LoI stage is small relative to the overall transaction. The cost of correcting a poorly negotiated LoI during SPA negotiations is not.

What happens if SPA negotiations deviate significantly from the Letter of Intent?

The LoI provides no automatic enforcement mechanism in most jurisdictions. If a party introduces SPA positions that are fundamentally inconsistent with the LoI, the other party can invoke it as a reference point and, if necessary, disengage from the process. The more practical consequence is that material deviations usually signal a breakdown in commercial trust, which is very difficult to repair at the SPA stage.

How long should exclusivity last in a Letter of Intent?

Typically 30 to 90 days, depending on transaction complexity. Periods beyond 90 days should be conditioned on measurable milestones. Open-ended exclusivity, or exclusivity with no mechanism to review progress, shifts leverage significantly toward the buyer and gives the seller no rational point at which to reintroduce competitive pressure.

Does a Letter of Intent need to be notarised or formally registered in Serbia?

No. An LoI in M&A transactions is typically a private document and does not require notarisation or registration to be effective. The binding provisions, primarily confidentiality and exclusivity, operate as private contractual obligations. Regulatory notification or approval requirements attach to the definitive transaction documents, not to the LoI.

Why the Letter of Intent Determines More Than Most Parties Realise

The Letter of Intent is the shortest document in any M&A transaction. It is also the one that determines most of what follows.

It sets the commercial framework. It tells you whether the parties actually agree, or whether they have managed to keep the disagreements politely out of view. It shapes negotiating leverage in ways that become visible only later. Clients who approach it with the same seriousness they give to the SPA consistently close on better terms, with less disruption and lower overall advisory cost.

Clients who treat it as a formality tend to spend the back half of the deal process fixing what the front half left unresolved.

If you are approaching a sale, acquisition, or investment and want to structure the process from the outset, our M&A and corporate advisory team works with buyers and sellers at every stage, including the LoI.

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