What is the significance of a letter of intent (LOI) in mergers and acquisitions?

The significance of a letter of intent (LOI) in mergers and acquisitions lies in its role as a preliminary agreement that outlines the basic terms of a proposed transaction. The LOI serves to clarify the intentions of both parties and creates a framework within which a detailed and definitive agreement will be negotiated. By summarizing key components such as price, structure, and timelines, the LOI reflects both parties' commitment to proceed with discussions toward finalizing a deal.

While the LOI itself may not be a binding contract, it does often contain provisions that signify good faith negotiations and can lay the groundwork for the terms to be negotiated in the definitive agreement. This importance of setting expectations and guiding future discussions underscores why a well-crafted LOI is critical in the M&A process.