Few documents in a transaction are as misunderstood as the letter of intent. Sellers often treat it as a handshake on paper; buyers sometimes treat it as an option to walk away. Both readings are wrong — and the difference is usually decided by language the parties barely negotiated.
The parts that bind immediately
Most letters of intent state that they are non-binding, then carve out provisions that are expressly binding. The carve-outs are where the real commitments live:
- Exclusivity. A no-shop clause can take your business off the market for sixty to ninety days. If the deal collapses on day eighty-five, that time is gone.
- Confidentiality. Obligations around diligence materials typically survive even if no transaction closes.
- Expenses and break fees. Some letters allocate costs — or impose a fee — if a party withdraws outside agreed conditions.
The parts that bind in practice, if not in law
Price and structure in a letter of intent are usually non-binding. But renegotiating them later carries a cost: the letter sets the anchor for everything that follows. A buyer who signs at one number and re-trades at another must justify the gap, and a seller who accepts a vague structure early will find that vagueness resolved against them in the definitive agreement.
Before you sign
Three questions worth answering with counsel before signature, not after:
- Which provisions are expressly binding, and for how long?
- What does exclusivity actually restrict — negotiations, solicitations, or mere discussions?
- What happens to diligence materials if the transaction does not proceed?
A well-drafted letter of intent narrows the space for later disputes. A poorly drafted one creates them. The hour spent reviewing it is routinely the highest-leverage hour in the entire transaction.
This commentary is provided for general information only and does not constitute legal advice. For advice on a specific situation, contact the firm.