Letter of Intent (LOI)
Also known as: LOI, Indication of Interest, IOI
Definition
A Letter of Intent outlines the proposed terms of a transaction before definitive agreements are drafted. It usually covers purchase price, structure, exclusivity, diligence timeline, working-capital assumptions, rollover, earnout, indemnity concepts, and closing conditions.
LOI is where leverage begins to move. Sellers often treat it as a headline-price document, but the operating details inside the LOI can determine how much of that headline survives diligence.
For tech middle-market companies, the most important LOI issues are not only price. They are structure, working-capital peg, exclusivity, diligence scope, customer-consent risk, IP cleanup, and which operational issues become closing conditions.
Related terms
- Earnout — A contingent purchase-price mechanism that pays sellers after close if agreed revenue, EBITDA, retention, or operational milestones are achieved.
- Net Working Capital — Current operating assets minus current operating liabilities. In M&A, the working-capital peg can materially change cash delivered at close.
- Quality of Earnings (QoE) — An independent forensic analysis of a target's reported earnings, normalizing for one-time items, accounting choices, and revenue-recognition decisions. The diligence step that determines real EBITDA.
Where this gets applied
- Financial Infrastructure — ARR waterfalls, deferred-revenue rules, board-pack standardization, FP&A architecture.
- Exit Readiness — Pre-LOI cleanup. Financial reporting normalization, contract hygiene, IP assignment review, customer-concentration mitigation.
- Migration & Integration — Post-merger integrations that hold customer and staff retention. 95% / 100% achieved on complex divestitures.