Which LOI Terms Should M&A Counsel Resolve Before Definitive Agreement Drafting?

Define the binding boundary before discussing drafting detail

Start with the selected buyer’s actual proposal, not a generic LOI template. Identify the proposed signatories and the sections intended to create present obligations. Distinguish those obligations from acquisition terms that remain subject to a definitive agreement. Ask whether any language commits the parties to negotiate within an agreed framework, and whether a signature, separate agreement, or incorporated document changes that framework.

The Delaware Supreme Court’s 2015 SIGA decision illustrates the importance of reading the documents together. It described an enforceable undertaking in executed bridge-loan and merger agreements to negotiate a license agreement consistently with a term sheet. The result depended on those contractual commitments and facts, not simply on the term sheet’s label. [1] It is not a rule that every LOI creates the same obligation. Counsel should assess the governing law, related documents, and actual wording before recommending a binding or nonbinding characterization.

Resolve exclusivity, disclosure permissions, and expense exposure

An exclusivity provision needs more than an end date. Resolve who is restricted, which activities are covered, when the restriction begins, and how extensions or early termination would work. Clarify how the seller should handle incoming inquiries and existing discussions. Consider whether an extension requires an affirmative decision rather than allowing drafting delay to determine the seller’s obligations. These are questions for the parties and counsel, not instructions for software to stop or contact buyers.

Compare confidentiality language with the existing nondisclosure agreement. Identify the proposed recipients, permitted uses, and any requested access to customers, employees, or advisers. Resolve who may authorize disclosure and whether the LOI supplements or replaces earlier terms. Separately identify responsibility for diligence costs, professional fees, and any reimbursement or termination payment. Do not presume these provisions are enforceable or harmless across jurisdictions. Counsel should review their intended operation and applicable law before the seller signs.

Set the acquisition structure and transaction perimeter

The LOI should identify whether the proposal contemplates assets, equity, a merger, or a structure still under review. Establish the proposed buyer entity, the selling parties, and the business included. Ask about excluded property, retained cash, assumed or retained obligations, real estate, intellectual property, and any pre-closing restructuring. A drafting instruction such as ‘purchase the business’ leaves too much unanswered when the buyer’s proposal assumes a narrower perimeter.

Tax assumptions deserve an explicit review owner. For qualifying U.S. federal tax asset acquisitions, the IRS Form 8594 instructions explain that purchase-price allocation determines the buyer’s basis and the seller’s gain or loss by asset. The instructions have defined coverage and exceptions, so they do not apply indiscriminately to every acquisition. [2] Qualified tax advisers should evaluate the particular structure. The LOI can identify the proposed allocation process and unresolved assumptions without selecting tax treatment or promising an after-tax result.

Clarify what the proposed price actually means

A headline price is not a complete drafting assumption. Separate consideration payable at closing from contingent payments, seller financing, rollover equity, and amounts withheld. Ask whether the stated amount refers to enterprise value or equity proceeds, and what treatment is proposed for cash, debt, transaction expenses, and working capital. Assign the financial definitions and accounting questions to the appropriate advisers rather than letting counsel infer them from a headline.

If a closing adjustment is proposed, identify the mechanism and the process for establishing its baseline. Determine which accounting policies, sample calculation, and dispute process require further agreement. For an earnout, surface the metric, measurement period, operational dependencies, and proposed dispute approach. The LOI need not contain every calculation rule, but it should reveal whether the parties have agreed on a mechanism or merely recognized a topic. Avoid treating ‘to be agreed’ as approval of whichever formula appears in the first draft.

Establish liability expectations without overloading the LOI

Indemnification is a contractual mechanism for allocating specified losses. ABA Business Law Today’s analysis describes negotiated limits including claim thresholds, caps, and survival periods, and examines how an offset can change the amount recovered. [3] Those concepts are useful prompts, not a prescribed market package. Ask whether the seller and buyer share an understanding of which parties will bear post-closing exposure and whether special liabilities require separate treatment.

Resolve material expectations about the scope of indemnification, any liability ceiling, the duration of exposure, and the proposed source of recovery. If an escrow, holdback, or insurance arrangement is assumed, identify that assumption and what remains unconfirmed. Do not characterize an escrow as automatically defining the seller’s maximum liability. Flag proposed exceptions, special indemnities, and the relationship between deferred consideration and claims. Counsel should evaluate remedies and enforceability under the relevant law before converting these commercial expectations into contractual language.

Surface closing conditions and seller commitments that affect the deal

A selected proposal can still depend on financing, diligence satisfaction, approvals, third-party consents, or arrangements with key personnel. Identify which conditions are requested, who is responsible for pursuing them, and what evidence remains missing. Ask whether the buyer’s funding plan supports the proposed structure and whether a financing condition has been expressly proposed. Avoid substituting an assumption of available funds for a verified source record.

Resolve major seller obligations that extend beyond delivering the business. These may include transition services, employment or consulting arrangements, rollover participation, and proposed restrictive covenants. Identify the affected parties, intended scope, and separate documents needed. Restrictive-covenant enforceability depends on applicable law and circumstances; do not assume a business-sale label settles the analysis. Counsel can mark an unresolved condition or commitment as a drafting dependency, making clear when further client instruction or specialist review is needed.

Build an issue list that separates evidence from advice

Prepare a verified LOI issue list separating source terms, open questions, and counsel’s advice. Use a stable identifier for each issue and record the document version, page or clause locator, relevant quotation, and any qualification in the source. A paraphrase should not replace the original wording. Where a proposal, attachment, or later written clarification conflicts, preserve the conflict and ask an authorized person to resolve it.

For illustration, a proposal stating ‘assets to be identified’ establishes neither the final asset list nor agreement on exclusions. The source term is that quotation. The open question is what property and obligations enter the transaction. Counsel’s advice is a separate, human-authored assessment of what must be resolved before signing or drafting. Give each question an accountable owner and decision status. Keep advice access separate from any commercial issue list intended for sharing; neither labels nor software establish privilege.

Pilot AI extraction with limited inputs and explicit stop conditions

The AI task is extraction, not approval: organize the selected proposal’s language into candidate binding provisions, structural assumptions, liability expectations, and open drafting questions. Counsel is accountable for legal characterization and advice. The source of truth is the approved document set and its versions, not the model’s memory. Instruct the tool to quote and locate each term, retain conditional language, and report absence as ‘not found in supplied sources’ rather than fill the gap.

Before using representation-related information, counsel and the firm’s technology or confidentiality reviewer should assess the specific tool’s contractual terms, retention, training use, and access arrangements. Choose a nonconfidential trial, a sufficiently minimized input approved for that use, or no AI processing. ABA Formal Opinion 512 discusses confidentiality risk assessment and informed consent where required, including certain self-learning tools; local professional rules and the specific facts control application. [4] Redaction alone does not establish that disclosure is permitted.

Run a bounded trial on an illustrative or authorized document and compare every proposed issue with the source. Check quotations, negations, amounts, cross-references, omissions, version conflicts, and invented legal classifications. Stop if a material term is missed or altered, a source locator is fabricated, input permission is uncertain, or the tool attempts external action. Resume only after the responsible reviewer addresses the cause. Opinion 512 calls for appropriate independent verification and preserves the lawyer’s professional responsibility. [4] This workflow requires human review of all extracted LOI issues, with no autonomous outreach, negotiation, disclosure, or approval.

Authorize drafting from the reviewed issue list, not AI output

At the handoff, counsel should distinguish resolved framework terms from issues deliberately deferred and questions that block further work. The seller or other authorized decision-maker supplies commercial instructions; counsel decides what legal advice to give and controls the drafting scope. Specialist questions retain their assigned owners. A deferred issue needs a stated assumption or reservation, not a blank space that the drafter might interpret as consent.

Acquivo is a software platform that delivers the entire sell-side M&A process, valuation, marketing materials, buyer matching, and deal management, on one platform for business owners, M&A attorneys, and boutique investment banks.

Acquivo is user-operated software with no success fee. The extraction and review process described here is a recommended implementation framework, not a claim that the platform provides every control or performs legal work. Software does not represent clients or replace qualified legal and tax advisers. The deliverable is a verified issue list that supports authorized drafting, while advice, negotiation, disclosure, and approval remain with the responsible people.