Review basics for M&A letters of intent

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Early in an M&A deal, the parties usually sign a letter of intent, MOU or term sheet before moving into due diligence and final negotiations. Because it is not the definitive agreement, it is tempting to treat it lightly, but how it is drafted can determine who controls the negotiation, how far due diligence reaches, and what the final contract looks like.

What an LOI actually is

An LOI records the deal structure, indicative price, exclusivity period and the conditions for signing a definitive agreement. In Japanese practice, the label alone (LOI, MOU or basic agreement) does not by itself determine legal effect. Most LOIs mix binding and non-binding provisions: price and the obligation to sign a final agreement are typically non-binding, while confidentiality, exclusivity and governing law are often binding. When the drafting is vague, the seller may assume nothing is final while the buyer proceeds as if the price were settled. An LOI should be reviewed as a document that sets the rails for the negotiation, not as a formality.

Exclusivity and how price is worded

Exclusivity is one of the heaviest provisions in an LOI. It protects the buyer's investment in due diligence, but if the period is too long or the scope too broad, it can seriously limit the seller's options. Price language matters just as much: stating a fixed price, saying it will be discussed based on due diligence, or building in adjustments for net cash and working capital each leave different room to negotiate later. For startups and growth companies, recent performance or a key person's continued involvement can move the valuation, so overcommitting to a price in the LOI makes it harder to adjust after diligence turns something up.

Separating due diligence scope from binding effect

Buyers want broad access across legal, financial and labor due diligence, while sellers want to control disclosure, data-room access and contact with employees and customers. Leaving this scope vague invites conflict once diligence begins. The same care applies to binding effect: language intended to be non-binding can still be read as creating obligations. Conditions to signing the definitive agreement, such as satisfactory due diligence, board or shareholder approval, counterparty consent and key-person retention, should be spelled out, along with how costs and any break-off rules apply if the deal does not proceed.

Risk on each side

For the buyer, the risk is committing to exclusivity and a price assumption without adequate diligence access, only to find a serious problem just before signing. For the seller, exclusivity itself is the risk. It can shut out other buyers for a long period, especially if the buyer's diligence or internal approvals move slowly. Confidentiality and data-room controls matter to both sides in case the deal falls through. The recurring risk is assuming an LOI carries no legal weight at all; when binding and non-binding provisions are not clearly separated, disputes over interpretation can follow.