After weeks of conversations, the major business terms finally seem to be coming together. The price is in range. The structure makes sense. Both sides want to keep moving. Someone says, “Let’s get the Letter of Intent signed.”
For many business owners, that document feels like a preliminary formality—a way to put the handshake on paper before the lawyers prepare the “real” agreement.
That is exactly why a Letter of Intent deserves more attention than it often receives.
A well-drafted Letter of Intent, or LOI, can give a transaction direction without prematurely locking the parties into a deal they have not fully negotiated. A poorly drafted one can create the opposite result: different expectations about what has already been agreed, leverage that shifts before due diligence begins, and arguments about whether a supposedly preliminary document created actual obligations.
The purpose of an LOI is not to finish the negotiation. It is to create a disciplined framework for finishing it well.
Why Use a Letter of Intent at All?
Buying or selling a business takes time. Before the parties invest heavily in diligence, accounting, financing, legal work, and management attention, they usually want some evidence that they are negotiating the same basic transaction.
An LOI can serve that purpose. It may outline the proposed purchase price, transaction structure, anticipated closing timetable, financing assumptions, treatment of key employees, due diligence process, and other major business terms.
That does not mean every detail belongs in the LOI. Quite the opposite. If the parties attempt to negotiate the entire acquisition agreement at the LOI stage, they may defeat the reason for using an LOI in the first place.
The better question is: which issues need enough agreement now to justify moving forward, and which issues should remain for diligence and the definitive documents?
The Biggest Misunderstanding: “It’s Non-Binding”
Business owners frequently hear that an LOI is “non-binding” and understandably conclude that nothing in it creates a present obligation.
That is too simple.
An LOI can be drafted so that the proposed transaction itself remains non-binding while particular provisions are expressly binding. Just as importantly, calling a document a “Letter of Intent” does not, by itself, answer whether the parties intended to create a contract.
Minnesota courts look beyond the label. The language of the document, the completeness of the material terms, conditions that remain outstanding, and the parties’ manifested intent can all matter.
That makes precision unusually important. If the parties intend that neither side is obligated to close unless and until a definitive agreement is signed, the LOI should say so clearly. If certain provisions are intended to bind the parties immediately, those provisions should be identified just as clearly.
A Letter of Intent should create clarity—not uncertainty.
What Usually Should Remain Subject to the Definitive Agreement?
In a business acquisition, many of the most important economic terms may be described in the LOI without becoming an unconditional promise to close.
Those terms can include the purchase price, whether the deal is structured as an asset or equity acquisition, financing assumptions, working-capital mechanics, anticipated closing conditions, employment arrangements, and other elements of the proposed transaction.
Why leave room?
Because diligence changes deals.
A buyer may discover customer concentration, unresolved litigation, tax exposure, aging receivables, unusual contract obligations, employee issues, intellectual-property questions, or capital needs that were not apparent during the first conversations. A seller may learn that the buyer’s proposed financing or post-closing expectations are different from what was initially understood.
The definitive agreement is where those discoveries are translated into representations and warranties, covenants, indemnification provisions, closing conditions, purchase-price adjustments, and other negotiated protections.
An LOI should establish enough alignment to justify that work without pretending the work has already been done.
What May Need to Be Binding Now?
Some provisions have little value unless they operate during the negotiation itself. These are the provisions that often deserve explicit binding treatment.
Confidentiality
A serious transaction requires disclosure of information that a business would not ordinarily provide to an outsider: financial performance, customer relationships, pricing, employee information, contracts, business plans, proprietary processes, and other sensitive material.
Sometimes the parties already have a nondisclosure agreement in place. If they do not, the LOI may address confidentiality directly or require a separate agreement.
The point is straightforward: the seller should know how its information may be used, who may see it, and what happens to it if the transaction does not close.
Exclusivity
Exclusivity—often called a “no-shop” provision—is one of the most commercially significant terms in an LOI.
A buyer preparing for diligence may spend substantial money and management time evaluating the target. The buyer may not be willing to make that investment while the seller simultaneously solicits competing offers.
From the seller’s perspective, however, exclusivity takes something valuable off the table: the ability to pursue another transaction for a period of time.
That means the length and scope of the exclusivity period matter. So do extensions, termination rights, and the conditions under which exclusivity ends.
An exclusivity clause should not be treated as harmless boilerplate simply because the acquisition itself remains subject to a definitive agreement.
Due Diligence and Access
The LOI may also establish the framework for due diligence: what information will be provided, when access begins, who may participate, and how the process interacts with confidentiality obligations.
That framework can prevent an avoidable problem later: one side believing it promised broad access while the other expected a much narrower review.
Expenses, Announcements, and Process Terms
The parties may also decide that provisions governing transaction expenses, public announcements, governing law, dispute procedures, or similar process issues should operate immediately.
Not every deal needs every provision. The important point is intentionality. The LOI should distinguish between the terms that describe a possible future transaction and the terms the parties expect each other to honor today.
A Practical Observation: Price Is Usually the Beginning, Not the End
Transactions often feel close to agreement once the parties settle on price. That can be misleading.
Price is important, but a $5 million deal can become economically very different depending on working capital, assumed liabilities, indemnification exposure, escrow or holdback terms, earnouts, employment arrangements, restrictive covenants, tax structure, and closing conditions.
Those are not drafting details. They can change the value and risk of the transaction.
This is why I am cautious when someone says, “We already agreed on the deal. We just need the lawyers to paper it.”
Sometimes the parties have agreed on the headline. The transaction still needs to be negotiated.
The best negotiations begin with clear expectations, not optimistic assumptions.
Do Not Give Away Leverage by Accident
An LOI also affects negotiating leverage.
If a seller grants exclusivity before understanding the buyer’s financing, diligence expectations, or proposed timetable, the seller may find itself unable to pursue alternatives while the buyer continues evaluating whether it wants the deal.
A buyer can create its own problem by agreeing too precisely to economic or structural terms before it has enough information to evaluate them.
Neither point means an LOI should be vague. Ambiguity is not strategy.
It means the document should be precise about what is settled, what remains open, and what must happen before either party becomes obligated to close.
Five Questions to Ask Before Signing
Before signing an LOI, I would want a business owner to be able to answer five questions:
- Which provisions are binding right now?
- Which terms are only a framework for continued negotiation?
- What happens if due diligence changes our view of the transaction?
- Are we giving up any meaningful rights—particularly through exclusivity—before we know enough?
- Does the LOI accurately describe the business understanding, or are we relying on conversations that never made it into the document?
If those answers are not clear, the LOI probably is not ready to sign.
When Should Counsel Review the LOI?
Before it is signed.
That sounds obvious, but counsel is often brought into a transaction immediately after the LOI has been executed. At that point, the document may already have established the commercial framework, granted exclusivity, set expectations about price and structure, or created other obligations.
Legal review at the LOI stage does not need to turn a preliminary document into a fifty-page acquisition agreement. In fact, good counsel should resist doing that.
The objective is to identify the provisions that matter now, preserve appropriate flexibility for the definitive agreement, and make sure the document says what the parties actually intend.
A well-drafted Letter of Intent moves the transaction forward without accidentally becoming the transaction itself.
Final Takeaway
A Letter of Intent should reduce uncertainty, not create it.
Used well, it gives buyers and sellers a common framework for the expensive and time-consuming work that follows. It confirms enough of the business understanding to justify moving forward while preserving room to address what diligence and further negotiation reveal.
Used carelessly, it can create expectations or obligations before either side has fully considered their consequences.
Before signing, understand what the document commits you to today, what remains subject to negotiation tomorrow, and what happens if the proposed transaction never reaches closing.
That is not merely good drafting. It is good transaction discipline.
How Lovstad Law Can Help
Lovstad Law advises Minnesota business owners, buyers, sellers, founders, and growing companies on letters of intent, business acquisitions and sales, transaction structure, due diligence, contract negotiation, and definitive agreements. If you are considering a significant transaction, involving counsel before the LOI is signed can help preserve flexibility and establish a clearer path toward closing.
Schedule a consultation with Lovstad Law to discuss your transaction.
This article is provided for general informational purposes only and does not constitute legal advice. Reading this article or contacting Lovstad Law PLLC does not create an attorney-client relationship. The enforceability and effect of any letter of intent depend on its language and the particular circumstances. Book a Call Now
