Does Signing a Letter of Intent Commit You to the Deal?

What an LOI Actually Is

A letter of intent (sometimes called a term sheet or memorandum of understanding) outlines the key proposed terms of a deal, purchase price, structure, timeline, before the parties invest significant time and money into full due diligence and a final agreement. It signals serious intent and creates a framework for negotiation.

Why Most of an LOI Is Non-Binding

The core business terms in an LOI, price, structure, closing conditions, are typically framed as non-binding, meaning either party can walk away if due diligence reveals a problem or negotiations break down over final terms. This flexibility exists because thorough due diligence has not happened yet, and both sides need room to adjust based on what they find.

This non-binding framing needs to be explicit in the document itself. Vague or ambiguous language about what is and is not binding is exactly the kind of gap that leads to disputes, and in some cases, courts have found that an LOI was more binding than the parties intended because the document did not clearly say otherwise.

The Provisions That ARE Usually Binding

Certain provisions within an LOI are typically drafted as fully binding contractual obligations regardless of whether the deal ultimately closes: confidentiality obligations protecting shared information, an exclusivity or “no-shop” clause preventing the seller from negotiating with other buyers for a set period, and sometimes a break-up fee if one party walks away without cause.

These binding provisions exist because they protect real, immediate interests, a buyer investing significant time and money in due diligence needs assurance the seller will not simultaneously be negotiating with someone else.

Exclusivity Periods

An exclusivity clause typically gives the buyer a defined window, often 30 to 90 days, during which the seller agrees not to solicit or negotiate with other potential buyers. This gives the buyer the confidence to invest in due diligence without worrying about losing the deal to a competing offer mid-process.

Why an LOI Still Matters Even if Mostly Non-Binding

Beyond its legal effect, an LOI serves a real practical purpose: it gets both sides aligned on the fundamental deal terms before spending significant money on attorneys, accountants, and due diligence for a deal that might not actually work on the business terms both sides envision.

It also becomes the reference point for drafting the final purchase agreement, disputes over what was “originally agreed to” are far easier to resolve when there is a written LOI to point back to.

What to Watch For Before Signing

1. Confirm which specific provisions are binding versus non-binding, this should be stated explicitly, not left to assumption.
2. Review the exclusivity period length and what happens if the deal doesn’t close within it.
3. Understand any break-up fee provisions and what triggers them.
4. Make sure key deal terms are specific enough to actually guide the final agreement, vague terms create disputes later.
5. Have an attorney review the LOI before signing, not just the final purchase agreement.

What Happens if a Deal Falls Apart After an LOI

If the non-binding business terms simply do not work out, poor due diligence findings, disagreement on final price, either party can generally walk away without breaching the LOI itself. But if a party violates a binding provision, breaching confidentiality, negotiating with another buyer during an exclusivity period, that can support a real legal claim, even though the underlying deal never closed.