Letter of Intent (LOI): Meaning and What It Should Contain

A letter of intent (LOI) is a declaration of intent that records the key terms of a planned company purchase — usually before due diligence begins and long before the final contract.

It is the moment when non-binding interest becomes a serious process. Anyone selling should know what an LOI does — and which parts of it are in fact binding.

What an LOI is for

The LOI records what both sides broadly agree on before they invest time and money in the review. It signals seriousness, sets the framework, and is the basis on which due diligence and contract negotiation build.

For the seller it is also a filter: whoever signs a solid LOI means it — unlike those making mere expressions of interest.

Binding or not?

This is the most important and most commonly misunderstood point. At its core — the intention to buy itself — the LOI is generally not binding: neither side is obliged to actually complete the purchase. The indicative price is an intention, not a promise; it is subject to due diligence.

Certain clauses, however, are indeed binding, and precisely these deserve attention: confidentiality, cost allocation — and above all exclusivity. Whoever agrees to exclusivity commits, for a defined period, to negotiate with no one else. In practice this binds almost only the seller and can switch off competition exactly when it would be most valuable.

What belongs in an LOI

A good LOI names at least:

• the object of purchase (shares or assets) and the structure
• the indicative purchase price and how it was determined
• the key conditions and assumptions
• the intended timeline and next steps
• access to due diligence and the data room
• confidentiality, exclusivity (duration!) and cost allocation
• which points are binding and which are not

The clearer these points, the less dispute later.

The LOI in the process

The LOI comes after the first approach and before due diligence. It is the switch from sounding out to a serious process — followed by the review, negotiation of the purchase agreement and closing. The overall process is described in "The process of selling a company"; what happens in the subsequent review in "What is a due diligence?".

Caution with the binding parts

Precisely because the LOI seems largely non-binding, sellers underestimate the binding clauses. An exclusivity that is too long or too broad, an unclear cost arrangement or a confidentiality clause that binds the seller one-sidedly can become costly. An LOI should therefore be reviewed legally — this is context, not legal advice.

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Frequently Asked Questions

What is a letter of intent?

A written declaration of intent that records the key terms of a planned company purchase — object, indicative price, timeline, conditions — usually before due diligence begins. It turns non-binding interest into a structured process.

Is a letter of intent binding?

At its core, the intention to buy, usually not — no one has to complete the purchase. But certain clauses are binding, in particular confidentiality, cost allocation and exclusivity. These binding parts should be checked carefully before signing.

What should an LOI contain?

The object and structure of the purchase, the indicative price and its derivation, key conditions, the timeline, access to due diligence, and confidentiality, exclusivity with duration, and cost allocation — plus a clear statement of which points are binding.

When is an LOI signed?

After the first approach between buyer and seller and before due diligence. It marks the transition from sounding out to a serious process and forms the basis for the review and contract negotiation.