Letter of Intent (LOI) is the standard abbreviation for the preliminary term sheet in M&A and large commercial deals — the document that frames price and process before the heavy legal draft.

How it works

Parties negotiate an LOI quickly to align on economics and timeline. Typical sections: purchase price and form of consideration, working capital treatment, key closing conditions, diligence scope, exclusivity, and confidentiality. Counsel then drafts the merger agreement or asset purchase agreement, which supersedes the LOI.

In venture exits, LOI to close can take 60 to 120 days depending on buyer type, regulatory review, and customer consent needs.

Why it matters

• Founders: Headline price in the LOI may adjust through diligence on working capital, debt-like items, and retention escrows. Model net proceeds, not the first number in the email.
• Investors: Liquidation preferences and participation rights determine how LOI price flows to common vs preferred. Waterfall modeling should precede board yes votes.

Management presentations and customer reference calls typically follow LOI signing. Prepare a diligence index assigning owners for each workstream: financial, legal, technical, commercial.

LOI price adjustments for working capital true-ups are standard in PE deals; venture-backed sales to strategics may use simpler structures but still include escrows for reps and warranties.

Common mistake

Treating the LOI as the finish line. Most value leakage and deal failure happen between LOI and definitive agreement.

Practical takeaway

Between LOI and close, assign internal owners for each diligence request and meet twice weekly on open items. Slow responses retrade price or kill deals — process discipline is as important as headline valuation.

Related ideas

• Letter of Intent
• Working capital adjustment
• Liquidation waterfall on exit proceeds