The Most Dangerous Word in an M&A Letter of Intent

The most dangerous word in a letter of intent may be nonbinding.

It sounds forgiving. Preliminary. A rough understanding that the lawyers can clean up later.

That is rarely how the next negotiation begins.

An LOI may be nonbinding as to whether the deal closes. It can still be highly determinative of the deal you are able to negotiate. Once you sign it, the other side does not see a blank page. It sees the bargain you already made.

Nonbinding Does Not Mean Inconsequential

The definitive agreement may be fifty pages long. The LOI may be three. Yet those three pages can decide who enters the longer negotiation with momentum, leverage, and the benefit of the doubt.

Terms included in the LOI begin to harden. A later attempt to change one can be called a retrade, even if the term was technically nonbinding. You may be asked to explain why your position changed or to give something elsewhere in return.

Terms omitted from the LOI can be just as difficult. When counsel adds a protection to the purchase agreement, the response may not be that the protection is unreasonable. It may simply be: That was not our deal.

We saw it recently in a lower middle market acquisition. Substantive protections added to the first purchase agreement were resisted because they did not appear in, or were said not to conform to, the signed LOI. The buyer then had to negotiate two questions at once: why the protection mattered and why the issue was still open.

That is the hidden cost of bringing counsel in after the LOI. Your lawyer begins behind the document instead of helping shape it.

Precision and Vagueness Are Both Strategy

Sophisticated parties do not merely negotiate what an LOI says. They negotiate how clearly it says it.

A party may want exact language where certainty favors it: purchase price, exclusivity, rollover equity, a seller note, or the length of a noncompete. The same party may prefer words such as “customary” or “to be mutually agreed” where flexibility favors it: working capital, indemnification, earnout mechanics, transition services, or closing conditions.

This is not necessarily bad faith. It is bargaining.

But the drafting can be asymmetric. One side gets a firm commitment where it wants protection and open language where it wants options. A selective list can also let the other side say that anything omitted was intentionally left out.

Silence is not always neutral. Sometimes it is stored leverage.

Before You Sign

Read the LOI as the first substantive draft of the transaction, not as permission to begin negotiating later.

For every material term, ask:

1. Why is this provision precise?

2. Why is this provision vague?

3. What important issue is missing?

4. Who benefits from the wording or the silence?

5. What will happen if we try to change or add this point later?

Then separate the deal points into three categories: decided, rejected, and reserved for the definitive agreement. The third category should be explicit. If indemnification, working capital, tax treatment, excluded liabilities, third party claims, financing, key consents, or other material matters remain open, do not assume everyone understands that. Say so.

The goal is not to turn every LOI into a purchase agreement. The goal is to prevent a short document from quietly deciding more than you intended.

Deal Side Implications

For buyers, price should carry its assumptions. Is the transaction cash free and debt free? What level of working capital must be delivered? Which liabilities stay with the seller? What diligence findings permit a change in price or structure? What happens if financing, a lease, or a required consent fails?

For sellers, a deliberate LOI can expose mismatched expectations before exclusivity begins and before time, money, and competitive leverage are spent. Clarity can protect a seller from a buyer that intends to renegotiate after the market has been cleared.

The legal boundary still matters. A California court found that a clearly nonbinding proposal did not create a contract on the proposed terms. Delaware recognizes that an express promise to negotiate in good faith can create an enforceable obligation. Munoz v. Patel; SIGA Technologies, Inc. v. PharmAthene, Inc.

But enforceability is only one question. The commercial question is whether the LOI will determine the starting position, the burden of persuasion, and the price of asking for something later.

Usually, it will.

Owner's Desk

An LOI should be short because the parties know what they are leaving open, not because they have not thought about it.

Before submitting or signing one, have transaction counsel identify the provisions that are binding, the positions that will be hard to reopen, the protections that are missing, and the words that give one side more room than the other.

Do not save the lawyer for the “real agreement.” By then, the real negotiation may already have happened.

Take the Annotated LOI Template

Use our working asset purchase LOI template to see the actual language, bracketed deal choices, and drafting notes that should be addressed before the definitive agreement.

Download the Annotated LOI Template.

If the deal is moving, Tolbert Legal can test those positions before they harden. Schedule a transaction readiness conversation.

Disclaimer

This publication is for informational and educational purposes only. It is not legal, tax, accounting, financing, or investment advice. The transaction observation is deidentified and used with authorization. Whether an LOI provision is binding or advisable depends on its language, governing law, transaction facts, and the parties' intent.