Letters of intent and term sheets serve similar functions in M&A: they memorialize the key deal terms before a definitive purchase agreement is drafted. But they are not interchangeable. The label matters less than the substance, but the typical structure, binding provisions, and strategic implications differ in ways that affect negotiation leverage and deal timeline.
A formal letter from the buyer to the seller outlining proposed deal terms, typically structured as a letter with a signature block. Most provisions are non-binding, with specific exceptions (exclusivity, confidentiality, expenses) that are explicitly binding.
Most M&A transactions, particularly acquisitions facilitated by brokers or investment bankers, deals involving SBA or bank financing (lenders typically require an LOI), and transactions where the buyer wants to secure exclusivity before committing to due diligence costs.
A concise, typically bullet-pointed document summarizing key deal terms. Less formal than an LOI and usually shorter. Often used in earlier-stage discussions or when parties want to align on economics before committing to a more formal document.
Early-stage discussions where both parties want to test alignment before formalizing, direct (non-brokered) transactions, sophisticated parties who prefer to negotiate key economics first, and situations where deal terms are still evolving.
| Factor | Letter of Intent (LOI) | Term Sheet |
|---|---|---|
| Format | Formal letter with signature block | Bullet-pointed summary document |
| Length | Typically 3-8 pages | Typically 1-3 pages |
| Exclusivity | Almost always includes a no-shop period | May or may not include exclusivity |
| Binding Provisions | Clearly delineates binding vs. non-binding sections | Binding status sometimes ambiguous |
| Lender Acceptance | Accepted by SBA lenders and banks as standard | Some lenders require a formal LOI instead |
| Negotiation Speed | Slower to draft and finalize | Faster to produce and iterate |
| Formality | Higher: signals serious commitment | Lower: signals interest and alignment |
| Strategic Use | Locks in terms and exclusivity before due diligence | Tests alignment before committing to formal process |
| When Typically Used | After initial negotiations, before due diligence | During initial discussions, before or alongside LOI |
Formal letter with signature block
Bullet-pointed summary document
Typically 3-8 pages
Typically 1-3 pages
Almost always includes a no-shop period
May or may not include exclusivity
Clearly delineates binding vs. non-binding sections
Binding status sometimes ambiguous
Accepted by SBA lenders and banks as standard
Some lenders require a formal LOI instead
Slower to draft and finalize
Faster to produce and iterate
Higher: signals serious commitment
Lower: signals interest and alignment
Locks in terms and exclusivity before due diligence
Tests alignment before committing to formal process
After initial negotiations, before due diligence
During initial discussions, before or alongside LOI
No direct tax implications from the LOI itself. However, the purchase price structure, allocation method, and deal structure outlined in the LOI set the framework for tax treatment in the definitive agreement.
Same as LOI: no direct tax consequences, but economic terms outlined in the term sheet inform the eventual tax structure.
Limited, provided the LOI clearly delineates binding and non-binding provisions. Risk areas include: inadequately drafted non-binding language, reliance damages if one party acts on LOI terms, and breach of binding provisions (exclusivity, confidentiality).
Generally lower risk than an LOI due to less formal structure and fewer binding provisions. However, unclear drafting can still create enforceability risks. Best practice is to include explicit language stating which terms are binding.
Use an LOI when you are ready to commit to due diligence, need exclusivity protection, are working with a broker or intermediary, or when your financing requires it (SBA loans almost always require a signed LOI). Use a term sheet when you are in early-stage discussions and want to test alignment on key economics, when the deal structure is still evolving, in direct transactions between sophisticated parties, or as a precursor to a formal LOI in complex deals.
Critical legal issues to evaluate when deciding between letter of intent (loi) and term sheet:
The most critical drafting issue in both documents. Every LOI and term sheet should explicitly state which provisions are binding (typically exclusivity, confidentiality, expense allocation, governing law) and which are non-binding (purchase price, structure, closing conditions). Ambiguity invites litigation.
LOIs typically include 30-90 day exclusivity periods. This is the buyer's primary protection against being used as a stalking horse. The period should align with realistic due diligence timelines. Too short and the buyer rushes; too long and the seller loses leverage.
Some LOIs include provisions requiring one party to reimburse the other's expenses if the deal falls through under certain conditions. These provisions shift risk and should be carefully negotiated.
Some jurisdictions impose a duty to negotiate in good faith once an LOI is signed, even if the underlying terms are non-binding. This can prevent a party from using the LOI period to conduct due diligence while simultaneously negotiating with other parties.
Both documents should include clear language stating that the definitive purchase agreement supersedes all prior agreements, including the LOI or term sheet. This prevents conflicting terms from creating ambiguity post-closing.
Common questions about letter of intent (loi) vs term sheet
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