Letter of Intent (LOI): What Really Binds You and How to Draft It

Quick answer. A letter of intent (LOI) opens the negotiation of a sale: it is rarely binding on the principle of the sale itself, but some clauses certainly are. Exclusivity, confidentiality and the allocation of costs generally bind the parties; the indicative price and scope remain negotiable until the final contract. Above all, since the 2016 contract-law reform, the conduct and breaking-off of negotiations must respect good faith (Article 1112 of the Civil Code): an abrupt rupture can engage the author's liability, even with no signed contract.

The letter of intent — also called LOI or term sheet — formalises a buyer's serious interest after the first exchanges and before the final contract. It serves three purposes: signalling a credible offer, setting the deal's general framework (envisaged price, scope, timeline) and protecting both parties during due diligence through exclusivity and confidentiality.

It is neither a mere courtesy nor a sales contract: it is a framework of intent with safeguards, upstream of the final sale deed. Several months often pass between the LOI and final signing, during which the parties share sensitive data and block other bidders — hence the value of careful drafting.

The trap is to believe an LOI is either wholly binding or wholly without value. In reality, it mixes both, depending on the wording chosen clause by clause.

A commitment verb ("undertakes", "will not") makes a clause binding; the absence of precision ("for guidance") deprives it of binding force. Procedural clauses — exclusivity, confidentiality, timeline — are in practice the most robust.

Article 1112 of the Civil Code states that the initiation, conduct and breaking-off of pre-contractual negotiations are free, but must satisfy the requirements of good faith. Crucially, it frames compensation: in the event of fault, damages cannot compensate either the loss of the benefits expected from the unconcluded contract, or the loss of the chance to obtain those benefits.

In other words, an abusive rupture can give rise to damages — costs incurred, disruption — but never the equivalent of the expected sale's profit. To this are added the duty of information of Article 1112-1 (disclosing information whose importance is determinative for the other's consent, excluding the estimate of value) and the confidentiality obligation of Article 1112-2 on information obtained during negotiation.

1. Qualify the nature of the LOI in the preamble: stating which clauses bind and which do not avoids most misunderstandings.
2. Delimit the scope: what is sold (shares or goodwill), and what is explicitly excluded (real estate, certain contracts).
3. Frame the price: an indicative range or a fixed price with an adjustment formula (for instance on net cash at completion).
4. Set exclusivity: a precise duration and scope, as this clause protects the buyer engaged in due diligence.
5. Impose confidentiality: scope, duration and the fate of documents if the deal fails.
6. List the conditions precedent: financing, due diligence outcome, any approvals, with measurable thresholds rather than vague wording.
7. Set a timeline: milestones and a deadline for signing the final deed.
8. Plan the exit: legitimate grounds for rupture and the fate of costs incurred.

To prepare this phase well, the seller benefits from having organised their data room and from a solid prior valuation, so price can be discussed on tangible grounds.

A sale follows a chain of documents that must not be confused, as they do not bind to the same degree.

The letter of intent opens the relationship and protects the due diligence phase; the agreement protocol seals the mutual commitment once checks are done, listing the conditions precedent (financing, approvals); the final deed effects the transfer and triggers payment. Confusing these stages is a classic source of dispute: a seller who believes the deal done at the LOI stage may be surprised that an adverse due diligence lets the buyer renegotiate or withdraw, as long as the protocol is unsigned.

A typical letter-of-intent structure#

A readable LOI is organised into a few blocks: the parties' identity, the qualification of the document (binding and non-binding clauses), the scope sold, the price or its range, exclusivity, confidentiality, conditions precedent, the timeline and the governing law. This skeleton, reviewed by your lawyer and your accountant, is enough to remove most misunderstandings. Too brief an LOI leaves sensitive topics to the final negotiation; too detailed an LOI freezes points that would have been better left open until due diligence.

Finally, the wording of a letter of intent matters as much as its content. Each clause should state explicitly whether it binds the parties: ambiguous wording invites recharacterisation by a court, which will look for the parties' common intention beyond the words used. On sensitive points — exclusivity, confidentiality, exit conditions — clear, dated drafting beats elegance that leaves room for doubt. This is the value of a cross-review by your lawyer and your accountant before signing: a few hours of advice here save weeks of litigation later.

Contribution-sale and holding. Where the LOI provides for a contribution of shares followed by a sale, it must separate and date each step, as the timeline conditions the deferral regime of Article 150-0 B ter.

Vendor loan. If part of the price will be deferred, the LOI should set out the principle and the collateral upfront, a topic we detail in our vendor loan guide.

Earn-out. An earn-out clause must rest on a precise formula and a verifiable metric; otherwise it becomes a source of disputes after signing. It falls under freedom of contract (Article 1102 of the Civil Code), hence the importance of unambiguous drafting.

• Do not confuse LOI and final deed: between the two, due diligence may reveal items justifying a price adjustment or an exit.
• Always date the LOI's validity: without a term, the seller can be tied up by a buyer who does not advance.
• Specify conditions precedent: "subject to satisfactory due diligence" is too vague; setting thresholds objectifies the exit.
• Have the LOI reviewed: a poorly drafted document can be recharacterised by a court as more binding than it appears.

Recently, an owner saw a "virtually certain" sale fall through because the LOI did not organise the buyer's right to withdraw if financing failed. After four months of negotiation and two rounds of due diligence, the buyer pulled out; the LOI only bound them to exclusivity, not to closing. The seller lost time and visibility, with no real recourse.

An LOI is therefore not a formality but a strategic document. Our role, alongside the lawyer, is to secure its financial and tax dimension: consistency of price with the valuation, realistic conditions precedent and anticipation of the tax consequences of the chosen structure.

Hayot Expertise advice. Never sign a letter of intent without a cross-review by a lawyer and your accountant. As a seller, pin down exclusivity, timeline, conditions precedent and the price formula; as a buyer, ensure enough due diligence time and a possible exit if financing fails. We coordinate this preparation so the LOI serves the negotiation rather than undermining it.