LOI vs Purchase Agreement — What's Binding and What Isn't
The LOI sets price expectations. The purchase agreement sets the actual deal. Don't sign an LOI with weak terms because 'we'll figure it out in the APA' — you won't.
The bottom line
LOIs are mostly non-binding (the exclusivity and confidentiality provisions ARE binding). The fight in the LOI is over: price, deal structure (asset vs stock), earnout terms, working-capital target, escrow size, exclusivity period. Get all six right at LOI stage. The purchase agreement is the 60-100 page legal document where everything else (reps, warranties, indemnities, covenants) gets argued — but the headline is locked. Lawyers earn their fee at APA stage; the seller earns their multiple at LOI stage.
Side-by-side comparison
| Aspect | Letter of Intent (LOI) | Purchase Agreement (APA / SPA) |
|---|---|---|
| Length | 3-10 pages typically | 60-150+ pages typical |
| What's binding in it | Exclusivity (45-90 days typical), confidentiality, costs/expenses. Everything else is non-binding 'intent.' | Everything — every word matters |
| Where re-trades happen | n/a (LOI is pre-diligence) | Working capital normalization, EBITDA add-back disputes from QofE, customer concentration disclosure surprises, IP/contract assignment issues |
| Time from sign to next stage | 60-90 days of due diligence | Closes at signing OR has 30-90 day delayed close (financing, regulatory, consents) |
| What to fight HARD for at LOI | Working capital methodology (peg vs target), escrow percentage + duration, earnout metric + period, exclusivity duration, breakup fee if seller walks | Materiality scrapes, indemnity caps + baskets, fundamental reps survival, IP reps scope |
| What gets traded later | Reps and warranties scope, indemnity baskets, special indemnities | n/a (this IS the trade) |
| Mistakes that cost | Signing without clear working-capital methodology; accepting 'TBD' on key earnout terms; accepting buyer's exclusivity duration without breakup fee | Letting your lawyer fight every comma instead of focusing on the 5-7 actual material points |
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