Letter of Intent vs Term Sheet in M&A

A letter of intent and a term sheet are the documents where a deal stops being a conversation and starts being a deal. Both come after the early flirting and before the binding contracts, both set out price and headline terms, and both are mostly non-binding. The difference is mostly one of format and convention: a letter of intent (often called an LOI) is a written letter from buyer to seller, while a term sheet is a structured bullet list of terms. I have signed both as a founder raising money and read plenty as the person on the other side, and I will tell you up front that the format matters far less than the few clauses inside that actually do bind you.

This guide explains what each document is, who drafts it and when, how the two compare clause by clause, a checklist of terms to nail down before you sign, the red flags that quietly cost sellers leverage, and how a data room turns the awkward gap between handshake and close into something you can control. It sits inside the wider M&A process, so if you want the full arc from first contact to integration, start there and come back here for the part where the terms get written down.

What a letter of intent and a term sheet actually are

Both documents do the same core job. They take an informal agreement to do a deal and turn it into a written summary that both sides can point to while the lawyers draft the real contracts. They typically cover price, structure, key conditions, and an exclusivity period. And in almost every case, the headline economic terms are non-binding, which means either side can still walk away.

Where they differ is convention, and it breaks down roughly like this.

A letter of intent is written as a letter, in prose, usually from the buyer to the seller. It reads like a formal note: "We are pleased to submit this letter outlining the proposed terms under which we would acquire..." It is the more common format in mergers and acquisitions, especially when the buyer is a company or private equity firm acquiring a whole business. Because it is a letter, it tends to carry a slightly more relational tone and sometimes a bit more narrative around intent and timeline.

A term sheet is the same content stripped to a structured list. Each term sits on its own line: purchase price, payment structure, escrow, exclusivity, conditions to closing, expiration date. It is the standard format in venture capital financings, where investors and founders have largely agreed on a template shape and just need to fill in the numbers. Term sheets are also common in M&A, particularly when several parties are comparing offers and want them in a format that lines up side by side.

The honest summary: in M&A you will more often see "LOI," in venture rounds you will more often see "term sheet," and the legal weight comes from the specific clauses, not the label on the document.

What is binding and what is not

This is the part that actually matters, and it is the part founders most often get wrong. Both an LOI and a term sheet are described as non-binding, but that is shorthand. The economic terms are non-binding. A handful of specific provisions almost always are binding, and they are the ones that can hurt you.

The clauses that typically do bind both parties:

• Exclusivity (the no-shop). Once you sign, you usually agree not to talk to other buyers for a set period, often 30 to 90 days. This is the single most consequential binding term for a seller, because it hands the buyer leverage and takes away your fallback.
• Confidentiality. Both sides agree to keep the discussions and any shared information private. Often this points back to an earlier NDA.
• Expense allocation. Who pays for what, particularly if the deal collapses.
• Governing law and dispute terms. The boring procedural clauses that quietly survive even when the price does not.

Everything else, the price, the structure, the conditions, is an expression of intent that either side can renegotiate or abandon until the definitive agreement is signed. The practical takeaway is to read every LOI and term sheet as if the binding clauses are the only words on the page that fully count, because legally they are close to it.

Who drafts it, and when

These documents show up at a predictable moment and the drafting side is fairly consistent.

Scenario	Who usually drafts it	Typical format	When it lands
M&A acquisition	The buyer	Letter of intent	After initial diligence and pricing talks, before full due diligence
Private equity buyout	The buyer (PE firm)	Letter of intent	After a first management meeting and indicative valuation
Venture financing round	The lead investor	Term sheet	After partner meetings, before legal diligence
Auction or competitive sale	Each bidder submits	LOI or term sheet to the seller's format	At the end of the first bid round

The pattern is that the side putting money in tends to draft, because the offer is theirs to make. In a sell side M&A process run as a competitive auction, the seller's advisor often dictates the format so that bids arrive comparable, which is one of the quiet advantages of running a structured sale rather than negotiating with a single buyer.

Timing-wise, both documents sit at the hinge of the deal. They come after enough conversation to agree a rough price but before the heavy lifting of confirmatory diligence and definitive contracts. Signing one is the trigger that opens the data room fully and starts the clock on exclusivity.

Letter of intent vs term sheet, compared

Here is the side-by-side I wish someone had handed me the first time.

Feature	Letter of intent	Term sheet
Format	Prose, written as a letter	Structured bullet list of terms
Most common in	M&A, private equity	Venture financing, competitive bids
Drafted by	Usually the buyer	Usually the lead investor or buyer
Tone	More relational and narrative	More transactional and templated
Binding terms	Exclusivity, confidentiality, expenses	Same: exclusivity, confidentiality, expenses
Economic terms	Non-binding intent	Non-binding intent
Length	One to several pages	Often one to two pages
Leads to	Definitive purchase agreement	Definitive financing or purchase agreement

If you take one thing from this table, take the two rows in the middle. The binding and economic columns are identical across both documents. The choice between an LOI and a term sheet is largely a choice of style and context, not of legal substance. Lawyers will sometimes have a preference, and certain industries lean one way, but the protections you care about live in the clauses, not the cover.

The terms to nail down before you sign

Whether the document is called an LOI or a term sheet, these are the terms I check line by line before signing anything. Use this as a pre-signature audit.

Term	What to confirm
Purchase price or valuation	The headline number, and crucially how it is calculated and whether it is firm or a range
Deal structure	Asset purchase, stock purchase, or merger, since each has very different tax and liability consequences
Payment terms	Cash at close, earn-outs, seller financing, rollover equity, and the timing of each
Escrow and holdbacks	How much of the price is held back, for how long, and to cover what
Exclusivity period	The length of the no-shop, and whether it auto-renews or has carve-outs
Conditions to closing	What has to be true for the deal to complete, including financing and diligence outs
Expiration	The date the offer lapses if not signed, which prevents an offer hanging open forever
Confidentiality	What can be disclosed, to whom, and whether it ties back to an existing NDA
Expense responsibility	Who pays advisors, and what happens to costs if the deal breaks
Employee and management terms	Retention, new contracts, equity rollover, and any conditions tied to key people

The two lines that change a seller's life most are exclusivity and the payment structure. A long exclusivity period with no milestones can trap you with a buyer who slow-walks diligence while your leverage drains away. And an earn-out written loosely can turn a headline price into a number you may never fully see. Read those two slowly, and have your advisor read them slower.

Common red flags in an LOI or term sheet

These are the signals that make me pause before signing, whichever format the document arrives in.

• A long exclusivity period with no diligence deadline. Ninety days of no-shop with no obligation on the buyer to move is a leverage trap. Tie exclusivity to milestones or keep it short.
• A vague price that becomes a range later. If the number is "approximately" or "subject to adjustment" without a clear formula, the real price will be set during diligence, usually downward. Pin down the calculation method now.
• An earn-out that carries most of the value. When a large share of the price depends on hitting post-close targets you may not control, the headline number is marketing, not money. Negotiate the measurement terms hard or discount the figure in your own head.
• Broad conditions to closing. "Subject to satisfactory completion of due diligence" with no definition gives the buyer an open door to renegotiate or walk. Narrow it where you can.
• Financing contingencies on the buyer side. If the buyer needs to raise the money and the document protects them if they cannot, you are carrying their funding risk. Ask how committed the capital actually is.
• Silence on what happens to your information. If the document opens full diligence without clear confidentiality and a clean way to shut access off, you are exposing sensitive data on trust alone. That is a process problem with a process fix.

A measured response to a flag matters as much as the flag. I would rather negotiate a tight exclusivity clause openly than sign a loose one and resent it for the next three months.

How a data room fits around the LOI

Here is the practical link between this document and the rest of the deal. Signing an LOI or term sheet is the event that opens the data room fully. Before signing, a serious buyer sees a teaser and maybe a thin set of summary materials. After signing, with exclusivity running, they get the full set so confirmatory diligence can begin. The transition from "courting" to "exclusive" is exactly the moment your access controls earn their keep.

This is why I stage access deliberately. Early on, multiple interested parties might see high-level financials and the deck. Once one of them signs and exclusivity kicks in, they move into a deeper folder set while the others are paused. A purpose-built room like Plox makes that staging a setting rather than a scramble: granular permissions let you open the confirmatory diligence folders to the signed buyer the moment the ink dries, watermarking marks every sensitive document with the viewer's identity, and detailed activity logs tell you exactly which files the buyer's team is actually opening. That last signal is genuinely useful, because where a buyer spends their reading time during exclusivity tells you where the renegotiation, if there is one, will come from.

The controls also matter when a deal breaks. If exclusivity lapses and you reopen to other parties, being able to cut the first buyer's access cleanly, with a record of everything they saw, protects you. You do not strictly need specialized software to run this stage; small deals close on a shared drive and goodwill. But once you are sharing the full financial and legal file with a counterparty who has a no-shop over you, the access control and the audit trail change the texture of the whole process. For the deeper setup, the M&A data room guide walks through folder structure and staging, and if you are choosing a tool, the best virtual data room for M&A comparison covers what actually matters for deal-stage work.

Once the LOI or term sheet is signed, the work shifts to confirmation. The buyer runs buy side due diligence against everything in the room, and if the deal closes, attention turns to the post merger integration checklist and the unglamorous job of actually combining two companies. The signed term sheet is the bridge between all of it.

Frequently asked questions

Is a letter of intent the same as a term sheet?

Functionally, almost. Both summarize the agreed terms of a deal before the binding contracts are written, both cover price and structure, and both are mostly non-binding with a few binding clauses like exclusivity and confidentiality. The main difference is format: a letter of intent is written as a prose letter, while a term sheet is a structured bullet list. LOIs are more common in M&A and term sheets more common in venture financing, but the legal substance is essentially the same.

Is a letter of intent legally binding?

Mostly no, with important exceptions. The economic terms, the price, the structure, the conditions, are non-binding expressions of intent that either side can renegotiate or abandon until the definitive agreement is signed. But specific clauses are usually binding, particularly exclusivity (the no-shop), confidentiality, and expense allocation. Read those clauses carefully, because they bind you the moment you sign even though the headline price does not.

What is exclusivity in an LOI?

Exclusivity, also called a no-shop clause, is the seller's agreement not to negotiate with any other buyer for a set period after signing, commonly 30 to 90 days. It is usually binding, and it is the most consequential term for a seller because it removes your fallback options and hands leverage to the buyer. Negotiate it short, or tie it to diligence milestones, so a buyer cannot lock you up and then slow-walk the deal.

Who writes the term sheet, the buyer or the seller?

Usually the side putting in the money. In M&A that is the buyer drafting an LOI; in a venture round it is the lead investor drafting a term sheet. The exception is a competitive sale or auction, where the seller's advisor often dictates the format so that bids arrive in a comparable shape. If you are the seller running a structured process, having bids submitted to your template is a quiet but real advantage.

What comes after signing a letter of intent or term sheet?

Signing triggers two things: exclusivity starts, and full due diligence begins. The buyer gets complete access to the data room and runs confirmatory diligence on the financials, contracts, and legal records. If everything checks out, the lawyers draft the definitive purchase or financing agreement, which is the binding contract that actually closes the deal. If diligence surfaces problems, the terms in the LOI get renegotiated before anyone signs the final papers.

How long is a term sheet valid?

A well-drafted term sheet or LOI includes an expiration date, often a week or two, after which the offer lapses if it has not been signed. This prevents an offer from hanging open indefinitely and gives both sides a clear deadline to decide. Once signed, the document's exclusivity clock starts and typically runs for the negotiated no-shop period while the parties work toward definitive agreements.