An agreement of intent is a preliminary document that two parties sign to lock in the major terms of a deal before anyone drafts the final contract. It captures the proposed price, the timeline, exclusivity arrangements, and the key conditions, so both sides know they’re close enough on the fundamentals to justify spending real money on lawyers, auditors, and due diligence. You’ll also see it called a letter of intent, or LOI. Most of its deal terms carry no binding legal force. A handful of specific provisions, however, are fully enforceable from the moment the ink dries, and mistaking which is which can be expensive.
Memoranda of understanding (MOUs) and term sheets occupy nearby territory and the labels get used loosely. The legal effect of an MOU and an LOI is essentially the same. What controls isn’t the title at the top of the page but the language inside: a document called a “nonbinding term sheet” that includes a clear exclusivity commitment with a termination fee is more enforceable than one called a “binding agreement” that hedges every provision with “subject to further negotiation.”
What It Does in a Deal
The agreement of intent sits between the handshake and the definitive contract. It signals that two parties have moved past general interest into serious negotiation, and it sets the rules for the period in between. The buyer needs enough protection to justify ordering an audit, hiring deal counsel, and pulling executives off their day jobs. The seller needs enough definition to open the books and let strangers walk through the business.
Signing the document typically triggers the due diligence period, grants access to financial records and facilities that would otherwise be off-limits, and starts the clock on any exclusivity window. It also establishes a target date for executing the final purchase agreement and an anticipated closing date, along with a termination or “drop-dead” date after which the agreement expires automatically if the deal hasn’t closed. That drop-dead date prevents a stale LOI from blocking either party’s ability to pursue other opportunities.
What’s Inside One
The document opens by identifying each party by legal name and business address, along with the name and title of whoever has authority to sign. For corporations and LLCs, that’s typically an officer or manager whose authority comes from the entity’s articles of incorporation, bylaws, or operating agreement.
The transaction description spells out what’s actually changing hands. In an acquisition, that might be 100 percent of a company’s membership interests, or it might be a purchase of specific assets like equipment, inventory, and intellectual property. One SEC-filed LOI illustrates the distinction, with the buyer agreeing to acquire all equity membership interests in the target company rather than selected assets.1Securities and Exchange Commission. Binding Letter of Intent to Purchase the Equity of Klusman Family Holdings LLC Getting the structure right at this stage avoids weeks of negotiation on a deal one side would never accept.
Price appears either as a fixed dollar amount or as a range tied to a financial metric like a multiple of earnings. Roughly one in five M&A transactions also includes an earnout, where part of the price depends on the target’s performance after closing. Earnouts bridge valuation disagreements, but they’re contested in about 28 percent of deals that include them, so the LOI should define the performance metrics and the measurement period as precisely as possible.
Which Parts Bind You and Which Don’t
This is where agreements of intent trip people up. The document as a whole is typically nonbinding on the deal terms themselves, meaning neither party can sue for breach if the final price or structure shifts during negotiations. Phrases like “subject to contract” or “for discussion purposes only” reinforce that intent. Courts have consistently held that “subject to contract” means neither party is bound unless and until a formal agreement is executed, and each side reserves the right to withdraw before that point.
But specific provisions are carved out as binding from the moment the LOI is signed, and they survive even if the deal falls apart. The three most common are:
- Confidentiality. Each party agrees not to disclose the other’s sensitive information shared during due diligence. This obligation survives whether or not the deal closes, often for one to three years beyond termination.
- Exclusivity. The seller agrees not to solicit or entertain competing offers for a set period, giving the buyer time to complete due diligence without being outbid.
- Break-up fees. If one party walks away under specified circumstances, it owes the other a predetermined fee to cover time and expenses.
Breach of any of these can result in significant financial penalties or a court order forcing compliance. The document should state explicitly, section by section, which clauses are binding and which are not, and include a general clause confirming that only the designated provisions are enforceable.
A separate wrinkle applies when the transaction involves the sale of goods rather than a business or real estate. Under Uniform Commercial Code Section 2-204, a contract for goods doesn’t fail for indefiniteness as long as the parties intended to make a deal and there’s a reasonably certain basis for a court to fashion a remedy.2Legal Information Institute. Uniform Commercial Code 2-204 – Formation in General A goods-related LOI with enough specificity could be treated as an enforceable contract even if both parties assumed it was just a preliminary step. Anyone drafting on the goods side needs to be especially careful about disclaiming binding intent.
One more clause almost always designated as binding: the choice-of-law provision. It determines which state’s law governs any dispute about the LOI itself, including the duty to negotiate in good faith. Given how much state law varies on that point, this isn’t a throwaway, as the next section explains.
When “Nonbinding” Still Costs You
Signing an LOI labeled “nonbinding” doesn’t automatically mean you can walk away without consequence. Courts in many jurisdictions recognize what’s known as a Type II preliminary agreement: a document that commits both parties not to the final deal itself, but to an obligation to negotiate the remaining open terms in good faith.3Justia Law. Teachers Insurance and Annuity Association v Tribune Co 670 F Supp 491 Under this framework, you can’t renounce the deal, abandon negotiations, or insist on conditions that don’t conform to what the LOI already established.
Good faith doesn’t mean you have to accept every term the other side proposes. You can reject proposals you find unacceptable and negotiate hard on open issues. What you can’t do is deliberately stall, impose unreasonable new demands designed to sabotage the deal, or walk away for pretextual reasons after the other side has spent heavily in reliance on your commitment to keep negotiating.
Damages for breaching the duty to negotiate in good faith depend heavily on which state’s law applies. In most states, recovery is limited to reliance damages: the other side’s out-of-pocket costs for lawyers, accountants, due diligence, and sometimes the opportunity cost of deals they passed up while negotiating with you.4FindLaw. Copeland v Baskin Robbins USA Lost profits from the deal that never closed are generally not recoverable, because there’s no way to know what the final terms would have been.
Delaware is the notable exception. Courts there have awarded expectation damages, putting the non-breaching party in the position it would have occupied if the deal had actually closed. That exposure is dramatically larger. It’s one reason the governing law and venue clauses in your LOI matter more than most people realize, and why they’re almost always on the binding side of the line.
Exclusivity Periods and What They Lock In
Exclusivity periods in most private M&A deals run between 30 and 90 days, with 45 days a common starting point for mid-market transactions. More complex deals, particularly in regulated industries or with cross-border elements, often push to 90 or 120 days. The length reflects a real tension. Buyers want enough time to dig through the records without worrying about a competing bid; sellers don’t want to be locked out of the market longer than necessary.
A standard no-shop clause prohibits the seller from actively soliciting competing offers or sharing confidential information with other potential buyers during the exclusivity window. Accepting a competing bid in violation of a no-shop typically triggers a substantial break-up fee payable to the original buyer. Most no-shop clauses still allow the seller to respond to genuinely unsolicited offers, because a board of directors has a fiduciary duty to consider superior proposals even during an exclusivity period.
A go-shop clause runs in the opposite direction. It gives the seller an explicit window, usually one to two months, to actively canvass the market for a better offer after signing the LOI. These are more common in deals where the board wants to demonstrate it tested the market thoroughly. If a higher bid surfaces during the go-shop period, the original buyer usually gets the right to match, and the break-up fee for accepting a competing offer is typically lower than under a no-shop.
Conditions That Let You Walk Away
Most LOIs include conditions that must be satisfied before anyone is obligated to close. These aren’t formalities. They’re the escape valves that let either party walk away without triggering a break-up fee or a bad-faith claim if something fundamental changes.
- Financing contingency. The buyer can terminate without penalty if it can’t secure a loan within a specified timeframe. The clause should identify the loan amount, the maximum acceptable interest rate, and the deadline for obtaining a written commitment from the lender.
- Due diligence contingency. The buyer gets a defined period to review financial records, tax returns, employment contracts, pending litigation, and operational data, and can walk if the review uncovers material problems.
- Regulatory approval. For deals above certain size thresholds or in regulated industries, closing may be contingent on government approval. The LOI should allocate responsibility for preparing and filing any required applications.
- Board or shareholder approval. Either party’s governing body may need to sign off on the final transaction. Conditioning the deal on this approval prevents an executive from binding the company beyond their authority.
Specificity matters here as much as anywhere in the document. A vague financing contingency that says “subject to the buyer obtaining acceptable financing” gives the buyer almost unlimited discretion to kill the deal. Defining the loan terms, the lender requirements, and the deadline forces both sides to operate within a concrete framework.
Signing, and When It Ends
The LOI must be signed by someone with actual authority to bind each entity. For a corporation, that’s typically an officer whose authority derives from the articles of incorporation or bylaws. For an LLC, it’s usually a manager or member-manager designated in the operating agreement. If the signer lacks authority, the entire document may be unenforceable.
Electronic signatures are legally valid. Under federal law, a signature or contract cannot be denied legal effect solely because it’s in electronic form, as long as the transaction affects interstate or foreign commerce.5Office of the Law Revision Counsel. 15 USC 7001 – General Rule of Validity Digital signature platforms also leave a timestamped audit trail, which can matter if anyone later disputes whether or when the document was signed.
Termination happens in one of three ways. The LOI expires on its drop-dead date, a condition precedent fails and the affected party exercises its right to withdraw, or both sides mutually agree to end negotiations. The document should spell out what happens to the binding provisions after termination. Confidentiality obligations almost always survive, often for one to three years. Exclusivity, by contrast, typically expires the moment the LOI terminates, freeing the seller to pursue other buyers immediately.