Get the LOI Right
Because the LOI shapes the entire deal, mistakes at this stage cause problems, or failure, down the line. Most LOI errors fall into a few categories: leaving key terms vague, being unclear about what's binding, mishandling exclusivity, proposing unrealistic terms, and rushing without advisors. Knowing these helps both buyers and sellers get the LOI right and set up a deal that actually closes.
Whether you're buying or selling, get a broker's guidance on structuring an LOI that leads to a closed deal.
1. Leaving Key Terms Vague
An LOI that glosses over important terms, or leaves big issues "to be determined later", invites conflict during the definitive agreement, when positions have hardened. If the price mechanism, structure, or working-capital treatment isn't addressed at the LOI stage, expect a fight later. Address the material terms up front (see what to include), while leaving genuine detail for the purchase agreement.
2. Unclear Binding Language
One of the most dangerous mistakes: ambiguity about what's binding. If it's not clear which provisions bind the parties, one side may believe they're committed while the other doesn't, leading to disputes or even litigation. The LOI should explicitly state it's non-binding except for specified provisions (like exclusivity and confidentiality). Never leave this to interpretation.
3. Mishandling Exclusivity
Buyers who fail to secure exclusivity risk investing in due diligence while the seller keeps shopping; sellers who grant open-ended exclusivity risk being locked up indefinitely by a buyer who may not close. The fix is a reasonable, time-limited no-shop period that protects the buyer's investment without tying up the seller unfairly.
4. Unrealistic or One-Sided Terms
Proposing terms that are unrealistic, an inflated or lowball price, an aggressive one-sided structure, sours the deal and wastes time. An LOI should reflect a defensible valuation and a fair structure. Remember the parties often work together after closing; a scorched-earth LOI starts the relationship badly. See negotiation strategies.
5. Rushing Without Advisors
Signing an LOI hastily, without a broker's guidance and an attorney's review, is a frequent, costly mistake. The LOI feels preliminary, so people underestimate it, but it frames everything and carries binding obligations. Take the time to structure it well and have it reviewed. A little care here prevents big problems later. See what an LOI is.
Note: This article is general educational information, not legal advice. An LOI and purchase agreement are legal documents — have a qualified attorney review yours.
Frequently Asked Questions
What are common mistakes in a Letter of Intent?
The most common LOI mistakes are leaving key terms vague or deferring big issues to later, unclear language about what's binding, mishandling exclusivity (buyers not securing it, sellers granting open-ended no-shops), proposing unrealistic or one-sided terms, and rushing to sign without broker guidance and attorney review.
Why is unclear binding language in an LOI dangerous?
Because if it's not clear which provisions bind the parties, one side may believe they're legally committed while the other doesn't, leading to disputes or even litigation. The LOI should explicitly state that it's non-binding except for specified provisions like exclusivity and confidentiality, never leaving the question to interpretation.
What happens if key terms are left vague in an LOI?
Vague or deferred terms invite conflict during the definitive purchase agreement, when positions have hardened, and can derail the deal. Material terms like the price mechanism, deal structure, and working-capital treatment should be addressed at the LOI stage, while only genuine detail is left for the purchase agreement.
Should I have an LOI reviewed before signing?
Yes. Signing an LOI hastily without broker guidance and attorney review is a common, costly mistake. Although the LOI feels preliminary, it frames the entire deal and carries binding obligations like exclusivity and confidentiality. Having it structured well and reviewed by an attorney prevents significant problems later.
Avoid the LOI Pitfalls
Martin Navarro helps buyers and sellers structure LOIs that avoid the common mistakes and lead to closing. Let's talk, confidentially and with no obligation.
Request a Confidential Consultation Call or text: 818-633-3254 · 365navarro.martin@gmail.com