Letter of Intent / Term Sheet Template
A letter of intent anchors the economic terms and structural framework before the parties spend six figures on diligence and definitive-agreement drafting. This template handles M&A acquisitions, real-estate purchases, commercial leases, JV formations, and licensing — with the binding/non-binding boundary that Texaco v. Pennzoil taught the M&A bar to take seriously, no-shop and fiduciary-out mechanics, and break-fee structures within Delaware reasonableness limits.
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What a letter of intent actually does
A letter of intent — also called a term sheet or memorandum of understanding — is a preliminary document that anchors the economic terms and structural framework of a proposed transaction before the parties incur significant diligence and drafting costs. It has three core functions: (i) align the parties on price, structure, and material terms so the definitive-agreement negotiation is not derailed by fundamental disagreement; (ii) bind the parties to a narrow set of obligations (confidentiality, exclusivity, expense allocation) that protect the deal momentum during diligence; (iii) signal seriousness and create commitment to consummate a transaction on the outlined terms. The most-litigated aspect of the LOI is the binding/non-binding boundary — courts have awarded multi-billion-dollar verdicts based on enforcement of LOI provisions the parties thought were non-binding (most famously, Texaco v. Pennzoil, 729 S.W.2d 768 (Tex. App. 1987)).
Texaco v. Pennzoil — why binding/non-binding matters
In 1984, Pennzoil and Getty Oil agreed on a handshake "Memorandum of Agreement" outlining a takeover. Before the definitive agreement was signed, Texaco made a competing offer and Getty's board signed with Texaco. Pennzoil sued for tortious interference and won an $11.1 billion verdict (settled for $3 billion after appeal). The Texas court held that the MOA was an enforceable contract despite the parties' intent that a definitive agreement follow. The lesson: an LOI without a clear binding/non-binding boundary can be construed as fully binding. Every modern LOI includes a paragraph explicitly identifying which provisions are binding and which are not.
Specific scenarios this template covers
- M&A acquisition (stock or asset purchase): Purchase price (cash, stock, contingent), structure, working-capital target, earnout if any, indemnification framework (basket, cap, survival, escrow), no-shop period, expense allocation, regulatory and third-party consents, exclusivity, break fees if applicable.
- Real estate purchase: Purchase price, deposit and escrow, financing contingency, inspection period, title and survey, closing date, brokerage, prorations, and (for commercial) zoning and environmental contingencies.
- Commercial lease LOI: Tenant, premises, base rent, rent escalations, term, options to renew, tenant improvement allowance, brokerage, exclusivity (if retail), and personal guaranty if applicable.
- Joint venture formation: Parties, capital contributions, ownership splits, management structure (manager or board), exclusivity, non-compete during JV, deadlock and exit mechanisms, regulatory clearance.
- Technology licensing: Licensed IP, territory, exclusivity, term, royalty rate or fixed fee, minimum payments, milestone payments, audit rights, MFN if applicable.
- Equity financing (VC term sheet): Investor, investment amount, pre/post-money valuation, security type (preferred), liquidation preference, dividend rate, anti-dilution, board composition, protective provisions, registration rights, drag-along, tag-along, no-shop period.
- Settlement LOI: Settlement amount, payment timing, mutual release scope, confidentiality, non-disparagement, no-admission, return of property, dismissal mechanics.
Sections that decide whether the LOI is binding, non-binding, or somewhere in between
Binding/non-binding recital (most important clause)
Explicit identification of which provisions are binding and which are non-binding. Without this, courts will look to context to determine intent — and "context" can include emails, conversations, and party conduct, none of which the drafter can control.
"This Letter of Intent reflects the parties' current intent regarding the proposed Transaction. Except for Sections [Confidentiality, Exclusivity, Expense Allocation, Governing Law, Dispute Resolution] (the 'Binding Sections'), this Letter of Intent is NON-BINDING and does not create any legal obligation. No party shall be obligated to consummate the Transaction unless and until a Definitive Agreement is executed by both parties. The Binding Sections are intended to be legally binding and enforceable in accordance with their terms."
Pitfall: The Texas Supreme Court in Texaco v. Pennzoil upheld an $11 billion verdict because the parties' "Memorandum of Agreement" did not clearly disclaim binding effect. The single-paragraph binding-recital is the most important paragraph in the document.
Transaction structure and price (non-binding)
Anchor for the economic deal — purchase price, structure (stock or asset), payment terms, payment timing, contingent consideration (earnout). Specific enough to bind the parties commercially while expressly subject to definitive-agreement negotiation.
"Buyer proposes to acquire 100% of the issued and outstanding equity of the Company (the 'Transaction') for an enterprise value of $[●] in cash at Closing (the 'Purchase Price'), subject to: (i) customary working-capital adjustments based on a $[●] target; (ii) Buyer's confirmatory due diligence; (iii) negotiation and execution of a Definitive Agreement; (iv) [Seller board approval]; (v) [regulatory approvals under HSR Act]; and (vi) [other conditions]. The Purchase Price assumes the Company is delivered on a cash-free, debt-free basis."
Pitfall: A price that is "subject to satisfactory diligence" without further specification is illusory — but may also render the price term itself unenforceable. Anchor the price specifically and identify the conditions that can adjust it.
Earnout structure (non-binding)
For deals with earnout (contingent consideration), the LOI should outline the structure: measurement metric, measurement period, payment formula, earnout cap, post-closing governance, dispute resolution. Earnouts are the #1 source of post-closing M&A disputes.
"In addition to the Closing Payment, Seller shall be eligible for earnout consideration of up to $[●] (the 'Earnout'), payable in [cash / stock] based on the Company's achievement of revenue / EBITDA targets during the [12 / 24 / 36] months following Closing, calculated under the formula set forth in the Definitive Agreement. The Earnout is intended to align Seller's continuing involvement with the success of the post-Closing Company. The Earnout is subject to specific terms to be negotiated, including (i) measurement methodology, (ii) Buyer's permitted post-Closing operational changes, (iii) acceleration triggers, and (iv) dispute resolution."
Pitfall: Earnouts that do not specify post-closing operational controls give the buyer the ability to manipulate the metric (changing accounting policy, shifting revenue to other Buyer subsidiaries, etc.). Address operational controls and "good faith conduct" in the LOI, not just the definitive agreement.
Exclusivity / no-shop (binding)
Requires the seller to negotiate exclusively with the buyer for a defined period, prohibiting solicitation or acceptance of competing offers. For public-company sellers, must include a fiduciary-out permitting consideration of unsolicited superior proposals consistent with directors' Revlon duties.
"For a period of sixty (60) days from the date of this LOI (the 'Exclusivity Period'), Seller and its representatives shall not, directly or indirectly: (i) solicit, initiate, encourage, or respond to any inquiry, proposal, or offer for any Alternative Transaction; (ii) furnish any information about the Company to any third party in connection with an Alternative Transaction; or (iii) enter into any agreement or understanding regarding an Alternative Transaction. [For public-company sellers: Seller's board may, prior to execution of the Definitive Agreement, withdraw, modify, or qualify its recommendation in response to a Superior Proposal received without breach of this Section, but only after providing Buyer five (5) business days' notice and an opportunity to match.]"
Pitfall: Exclusivity provisions for public-company sellers without fiduciary outs are unenforceable as a breach of directors' Revlon duties (Revlon, Inc. v. MacAndrews & Forbes Holdings, Inc., 506 A.2d 173 (Del. 1986)). Private-company exclusivity is generally enforceable without fiduciary out.
Confidentiality (binding)
Mutual confidentiality covering the existence and terms of the LOI plus any confidential information exchanged during diligence. May incorporate a prior NDA by reference or stand alone if no NDA was previously executed.
"The parties shall maintain the confidentiality of (i) the existence and terms of this LOI; (ii) the fact that discussions regarding a potential Transaction are taking place; and (iii) all non-public information disclosed by one party to the other in connection with the proposed Transaction. The confidentiality obligations survive termination of this LOI for two (2) years. [Where applicable: The parties' Mutual Non-Disclosure Agreement dated [Date] is incorporated by reference and supplements (and to the extent of conflict, supersedes) the confidentiality provisions of this LOI.]"
Pitfall: For public companies, the existence of M&A discussions may be material information under Rule 10b-5 and trigger insider-trading and Regulation FD obligations. Coordinate the LOI with the existing NDA and securities-counsel review.
Diligence and access (non-binding with binding access mechanics)
Seller agrees to provide reasonable access for diligence; buyer agrees to limit diligence to defined scope and timeframe. Diligence outputs are typically subject to the confidentiality clause.
"Seller shall provide Buyer and its representatives reasonable access during normal business hours to the Company's books, records, facilities, personnel, customers (subject to clean-team protocol), and other information reasonably necessary to complete Buyer's confirmatory due diligence (the 'Diligence Period'). The Diligence Period shall extend for sixty (60) days from the date of this LOI. Diligence shall be conducted in a manner that does not unreasonably interfere with the Company's operations. All information obtained shall be subject to the Confidentiality Section."
Pitfall: Unlimited access provisions can disrupt seller operations and create antitrust exposure (especially when buyer is a competitor — see HSR Act and DOJ informal guidance on pre-closing information sharing). Use clean-team protocols for competitively sensitive information.
Break fee / termination fee (binding)
Specifies amounts payable on termination by certain triggers. For public M&A, break fees are subject to Delaware reasonableness scrutiny (3-4% of equity value is the soft upper limit). For private LOIs, expense-reimbursement clauses are more common than break fees.
"If Seller terminates this LOI to accept an Alternative Transaction, Seller shall pay Buyer a termination fee of $[●] (representing approximately [2-3%] of the proposed Purchase Price). If Buyer terminates this LOI because Buyer fails to obtain financing on terms previously specified, Buyer shall pay Seller a reverse termination fee of $[●]. Each party shall bear its own diligence expenses except as expressly provided."
Pitfall: Break fees over 4% of equity value for public M&A face Delaware enhanced scrutiny (Brazen v. Bell Atlantic, 695 A.2d 43). Reverse break fees in the buyer-financing context are increasingly common but should be calibrated to actual buyer cost exposure, not a punitive amount.
Expense allocation (binding)
Default: each party bears its own diligence and legal expenses. Some LOIs require the seller to reimburse the buyer's diligence costs if seller terminates outside the no-shop framework.
"Each party shall bear its own legal, accounting, financial advisory, and other expenses incurred in connection with the Transaction, except that if Seller terminates this LOI in breach of the Exclusivity Section, Seller shall reimburse Buyer's documented out-of-pocket expenses incurred during the Exclusivity Period, up to $[●]."
Pitfall: Expense allocation should be reciprocal in equal-bargaining-power contexts. One-sided expense provisions invite negotiation friction.
Term, termination, and governing law (binding)
Defines the LOI's term (typically 60-120 days), termination events, and the governing law for the binding provisions.
"This LOI is effective from the date of execution and continues until the earlier of (i) execution of the Definitive Agreement, (ii) the date that is [ninety (90) days] from the date hereof, or (iii) earlier termination by mutual written agreement. The Binding Sections survive termination of this LOI in accordance with their terms. This LOI is governed by the laws of the State of [Delaware], without regard to its conflict-of-laws principles. Any dispute regarding the Binding Sections shall be resolved by [arbitration administered by JAMS / litigation in the Court of Chancery of the State of Delaware]."
Pitfall: A long LOI term (180+ days) creates undue tail risk for the seller — extending the exclusivity period and tying up the seller's ability to pursue alternatives. Match the term to realistic diligence and drafting timelines.
Jurisdiction and structural notes
LOI law is mostly federal common law and state contract law, with critical overlays for public-company M&A and regulated industries:
- Delaware (Court of Chancery; DGCL): Default for public-company M&A LOIs. Court of Chancery enforces binding provisions strictly and has well-developed jurisprudence on fiduciary-out requirements, break-fee reasonableness, and no-shop scope. Delaware governing law plus Court of Chancery exclusive jurisdiction is the institutional standard.
- Texas (Texaco v. Pennzoil): 1987 decision affirming that an LOI without express non-binding language can be enforced as a contract. The cautionary tale that shaped modern LOI drafting.
- HSR Act (Hart-Scott-Rodino Antitrust Improvements Act, 15 U.S.C. §18a): Transactions exceeding the HSR thresholds (2024: $119.5M size-of-transaction; lower thresholds with size-of-person tests) require pre-merger notification to the FTC and DOJ and a 30-day waiting period. The LOI should identify HSR as a closing condition where applicable and address antitrust-related diligence carefully (clean-team protocols).
- Federal securities laws (Reg D, Reg M-A): For LOIs involving issuance of securities (equity financing, stock-for-stock M&A), the LOI must comply with Securities Act exemptions. Public-company M&A LOIs trigger Regulation M-A disclosure obligations once a definitive agreement is signed.
- Public-company Revlon duties: Once a public-company board decides to sell, directors have heightened duties under Revlon to obtain maximum value, requiring fiduciary outs in exclusivity provisions and reasonable break fees. Private companies are not subject to Revlon and can grant broader exclusivity.
- Industry-specific regulatory approvals: Banking (Federal Reserve under Bank Holding Company Act), insurance (state insurance regulators), telecommunications (FCC license transfers), broadcasting, defense (CFIUS for foreign-buyer transactions), healthcare (Hart-Scott-Rodino plus state CON laws). Identify all required approvals in the LOI as closing conditions.
- International (cross-border M&A): EU merger control (above EUR 5 billion combined turnover triggers EU Commission notification), UK CMA, German Bundeskartellamt, and 130+ other national merger-control regimes. LOIs for cross-border deals should identify the full slate of required regulatory approvals.
How to draft your LOI in LexDraft
Pick transaction type and structure
Open LexDraft in Word. Choose M&A (stock or asset), real estate purchase, commercial lease, JV formation, technology license, or equity financing. LexDraft applies the appropriate market-standard structure (e.g., HSR notification for over-threshold M&A; Revlon-compliant fiduciary out for public-company sellers; clean-team protocol for competitor diligence).
Set economic terms with specificity
Enter the price anchor (subject to working-capital and definitive-agreement negotiation), the earnout structure if applicable, the indemnification framework (basket, cap, survival), and the regulatory and closing-condition framework. The price anchor sets the negotiating range; ambiguity here is expensive.
Calibrate binding/non-binding scope
Identify each section as binding or non-binding. Confirm exclusivity period (with fiduciary-out if seller is public), break-fee structure (within Delaware limits for public M&A), confidentiality, expense allocation, and governing law. Download the .docx and execute via DocuSign or wet-ink.
Best practices a sophisticated M&A counsel would actually use
Always include the binding/non-binding recital
The single most important paragraph in the LOI. Without it, courts can construe the LOI as fully binding under Texaco v. Pennzoil. Identify each section as binding or non-binding expressly; do not leave to context.
Anchor the price specifically, not aspirationally
"Approximately $50 million" is meaningless; "$50,000,000 enterprise value, subject to a $5,000,000 working-capital target and customary closing adjustments" is meaningful. The price anchor sets the negotiating range — a soft anchor invites mid-negotiation downward pressure.
For earnouts: define the metric and operational controls in the LOI
Earnouts are the #1 source of post-closing M&A disputes. The LOI should identify the measurement metric (revenue, EBITDA, customer milestones), the measurement period, the payment formula, and (critically) the post-closing operational controls preventing buyer manipulation. Leaving earnout mechanics for "definitive agreement negotiation" guarantees a fight later.
Include a fiduciary out for public-company sellers
Delaware fiduciary doctrine after Revlon and QVC requires public-company directors to consider unsolicited superior proposals. An exclusivity provision without a fiduciary out is unenforceable as a breach of the directors' duties. Standard form: 5-business-day notice and match period before seller can change recommendation.
Calibrate break fees to Delaware reasonableness limits
For public M&A, break fees over 3-4% of equity value face Delaware enhanced scrutiny (Brazen v. Bell Atlantic, 695 A.2d 43). Reverse break fees (paid by buyer if financing fails) are increasingly common but should be calibrated to actual buyer cost exposure (typically 5-7% of equity value for committed-financing deals).
Use clean-team protocols for competitor diligence
When the buyer is a competitor of the seller, sharing customer-level pricing, gross margins, or roadmap creates antitrust exposure even before the deal closes. Route competitively sensitive information through a clean team (outside counsel, financial advisors, a small number of antitrust-cleared employees with no general business responsibility). The LOI should require clean-team protocol where applicable.
Identify all required regulatory approvals as closing conditions
HSR (over threshold), CFIUS (foreign buyer in sensitive industry), industry-specific regulators (banking, insurance, telecom, healthcare, defense), and international merger-control regimes. Missing a required approval delays or kills the deal. Engage regulatory counsel during LOI negotiation, not after.
Cap the LOI term at 90-120 days
An LOI without a term continues indefinitely and ties up the seller's ability to consider alternatives. The standard term — 60-120 days — should match realistic diligence and definitive-agreement-drafting timelines. Auto-extension on mutual written consent if needed.
Frequently Asked Questions About Letters of Intent
Partially, and the precise binding/non-binding boundary is the most-litigated aspect of the LOI. The market structure is: confidentiality, exclusivity (no-shop), expense allocation, governing law, and dispute resolution are binding; the economic terms (price, structure, timing) are non-binding expressions of intent subject to definitive-agreement negotiation. Courts will enforce binding portions and reject claims based on non-binding portions — but only if the boundary is clearly drawn. The Texas Court of Appeals' $11.1 billion judgment in Texaco v. Pennzoil (1987), settled for $3 billion — based on a handshake/Memorandum of Agreement between Pennzoil and Getty that Texaco interfered with — taught the M&A bar that ambiguous LOIs can create catastrophic liability. Modern LOIs explicitly identify each section as binding or non-binding.
A no-shop (also called exclusivity) requires the seller to negotiate exclusively with the buyer for a defined period — typically 30-60 days for mid-market M&A; 60-120 days for larger transactions. During the no-shop period, the seller cannot solicit, initiate, or respond to competing offers. Some no-shops include a "window-shop" or "fiduciary out" that permits the seller's board to consider unsolicited superior proposals consistent with their fiduciary duties (mandatory for public-company sellers under Delaware Revlon doctrine). No-shops are heavily negotiated — buyers want long, restrictive periods; sellers want short, narrow periods with fiduciary outs and match rights.
A break fee is a payment one party owes the other if the transaction fails for specified reasons. In M&A LOIs: a "termination fee" (paid by seller) if seller accepts a competing offer during the no-shop period; a "reverse break fee" (paid by buyer) if buyer fails to obtain financing. Break fees are typically 1-3% of transaction value for public M&A, higher for private. Public-company break fees are subject to Delaware reasonableness scrutiny (Brazen v. Bell Atlantic, 695 A.2d 43); fees over 3-4% of equity value face enhanced scrutiny. For private LOIs, break fees are less common and tend to be expense-based (capped at the buyer's documented out-of-pocket diligence costs incurred during the no-shop period).
Yes — with caveats. The LOI should anchor the price with specificity (e.g., "enterprise value of $50,000,000, subject to a $5,000,000 working-capital target") so the parties are aligned before incurring diligence costs. The price should be expressly subject to (i) completion of confirmatory due diligence; (ii) negotiation and execution of the definitive agreement; (iii) working-capital adjustments based on the closing balance sheet. Avoid "subject to financing satisfactory to buyer" or "subject to buyer's satisfactory diligence" — these are illusory and may render the LOI unenforceable on price entirely. Specify the price, and identify the conditions that can adjust it.
Most LOIs have a defined term of 60-120 days, after which the LOI expires unless extended by mutual written consent. The term should be long enough to complete diligence and negotiate the definitive agreement — typically 30-45 days of diligence plus 30-60 days of definitive-agreement negotiation plus a closing-conditions period. Binding provisions have their own survival: confidentiality typically survives 2-3 years; exclusivity terminates with the LOI; expense allocation survives until claims are barred by limitations.
The three terms are largely interchangeable in U.S. practice, with subtle conventions. "Letter of Intent" is typically more formal and broader, often used in M&A and real estate. "Memorandum of Understanding" (MOU) is more common in government, nonprofit, and international contexts, signaling a non-binding agreement on principles. "Term Sheet" is typically shorter and more economic-terms-focused, common in VC financing and licensing. All three are functionally similar — preliminary documents that outline material terms for a future definitive agreement. The label matters less than the document's content — specifically, whether it explicitly identifies binding vs. non-binding provisions. A document called "letter of intent" that fails to identify binding scope can be interpreted by a court as fully binding (Texaco v. Pennzoil).
An earnout is contingent consideration paid to the seller after closing based on the post-closing performance of the acquired business, measured against a defined metric (revenue, EBITDA, customer milestones) over a defined period (typically 12-36 months). Earnouts bridge valuation gaps when buyer and seller disagree about future performance — but they create acute alignment problems after closing because the buyer controls the operating decisions that drive the metric. Earnouts are the single largest source of post-closing M&A litigation. The LOI should specify (i) the metric and measurement period; (ii) the payment formula and cap; (iii) post-closing operational controls preventing buyer manipulation; and (iv) dispute-resolution mechanics. Leaving any of these for the definitive agreement guarantees a fight later.
Draft an LOI with a clear binding/non-binding boundary in Word
LexDraft handles the binding/non-binding recital that Texaco v. Pennzoil taught the M&A bar to take seriously, the Delaware-reasonableness-compliant break-fee structure, and the fiduciary-out mechanics required for public-company sellers.
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