Letter of intent
M&A / Merger ModelA document recording what the parties have agreed so far, almost all of it expressly non binding apart from confidentiality, costs and exclusivity.
Also written: LOI, heads of terms, term sheet, memorandum of understanding, MOU
The same document appears under several names. A letter of intent is in letter form, a term sheet is a schedule of terms, and heads of terms and memorandum of understanding mean the same thing again. In leveraged finance a term sheet means something narrower, being the lenders' statement of the shape of the debt rather than the parties' statement of the deal.
The crucial feature is that almost all of it is non binding by its own terms. Price, structure and timetable are statements of intent and either side can walk away from them. Two or three clauses are binding, and they are the ones worth reading: confidentiality, the allocation of costs, and exclusivity.
Candidates reliably read a signature as agreement. In a legal sense it is closer to the opposite: the document records that the parties are not yet bound on anything that matters. What it does achieve is commercial. It forces the argument about price and structure to happen before both sides spend money on confirmatory diligence and lawyers.
It also serves the bidder internally. A signed letter of intent is what a bidder takes to its investment committee or its credit committee, and fixing the price mechanism early makes any later change visible as a renegotiation rather than as a detail that drifted.
Worked example
A buyer signs a letter of intent at 300 subject to confirmatory diligence, with six weeks of exclusivity.
Nothing about the price binds it. What binds it is confidentiality, the costs clause, and the exclusivity that the seller has just paid for by standing the other bidders down.
Which is why the seller's protection is not the stated price. It is a short window, milestones inside it, and refusing to grant exclusivity until the buyer's financing is committed.