Letters of Intent and Term Sheets: Which Parts Actually Bind

A letter of intent is not automatically unenforceable just because someone typed "non-binding" at the top. Courts in most states read the document as a whole, look at the specific words attached to each promise, and enforce the parts the parties objectively agreed to be bound by. That is why an LOI can leave price, structure, and closing conditions entirely open while still creating real obligations on exclusivity, confidentiality, expense sharing, and — in some states — an obligation to keep negotiating honestly.

Term sheet, letter of intent, memorandum of understanding, heads of agreement: the labels are interchangeable in practice, and none of them controls the legal result. What controls is the language inside. This guide covers how to read one you have been handed, how to write one that does what you want, and where the analysis shifts when the deal is a sale of goods rather than a business, a lease, or a services relationship.

What these documents are actually for

The useful purposes of a preliminary document are practical, not legal. It confirms that both sides understand the same deal before either spends money on diligence and drafting. It gives a buyer a reason to pay for an audit or an environmental report. It gives a seller a defined window rather than an open-ended distraction. And in financed deals, it gives lenders and boards something concrete to approve.

The risk is that the same document quietly commits you to things you had not priced. An exclusivity period is a real cost to a seller with other interested parties. A confidentiality clause that survives termination can restrict your business for years. An expense-sharing provision can leave you paying for the other side's advisers after the deal dies.

The clauses that usually bind, and the ones that usually do not

There is no fixed list — the drafting controls — but commercial practice sorts provisions into predictable groups. Treat the table below as a starting map for reading a document you have been sent, then check the actual sentences.

Drafting the split so it holds

The reliable technique is not a disclaimer sentence; it is architecture. Separate the document into two clearly labeled parts and make each provision say what it is.

1. Create a numbered "Binding Provisions" section. Put confidentiality, exclusivity, expenses, publicity, governing law, dispute resolution, and termination of the LOI inside it. State plainly that these paragraphs are legally binding and enforceable.
2. Label everything else non-binding by paragraph number. A sentence reading "Paragraphs 1 through 9 reflect the parties' current expectations, do not create obligations, and are superseded entirely by any definitive agreement" is far stronger than a vague heading.
3. Say what ends the talks. Give the LOI an expiration date and a right for either party to walk away for any reason, with the binding provisions surviving for a stated period.
4. Name the condition precedent. Write that no obligation to complete the transaction arises unless and until both parties sign a definitive written agreement approved by their respective boards or members.
5. Check for accidental completeness. If every material term is settled and nothing is genuinely left to negotiate, a court may find a contract regardless of the label — particularly where one side has already started performing.

The duty to negotiate in good faith

This is the most jurisdiction-dependent part of the topic. Some state courts recognize an enforceable obligation to negotiate in good faith toward a definitive agreement where the parties clearly agreed to one, and they will hear a claim that a party walked away for a reason inconsistent with the LOI — reopening settled terms, refusing to meet, or negotiating with a competitor during exclusivity. Other states treat any such duty as too indefinite to enforce and will not police the collapse of talks.

Even where the duty exists, it is a duty of process, not of outcome. No court forces a party to sign a deal it does not want. Damages, where awarded, tend to compensate wasted expenditures rather than the profits the failed deal would have produced. Cornell's Legal Information Institute keeps an accessible overview of general contract formation principles, but the operative rule is always your governing state's.

Exclusivity, confidentiality, and the price of both

Exclusivity is the clause with the sharpest commercial edge. A seller granting it gives up leverage and market access for the duration; a buyer receiving it gets a protected window to spend diligence money. Negotiate it as the priced term it is.

• A defined period — measured in weeks, not "until the transaction closes" — with any extension requiring written agreement.
• An automatic end if the buyer materially changes the headline terms, which prevents a re-trade under the protection of a no-shop.
• A carve-out for unsolicited approaches the seller may receive and must not encourage, if the seller has fiduciary concerns.
• Clarity on whether the seller may continue ordinary-course discussions with lenders, landlords, or franchisors.
• A separate, standalone confidentiality agreement where the information exchanged is sensitive, so protection does not depend on the LOI surviving.

Confidentiality deserves its own attention because it typically outlives the deal. Define the covered information, list the standard exclusions, set a return-or-destroy obligation, and state a survival period. If the target is a franchise, a technology company, or a business whose value sits in its people, also address non-solicitation of employees during and after the talks — an issue that overlaps with the analysis in post-employment restrictive covenants.

Goods deals, writing requirements, and signatures

When the subject is goods rather than a business or a service, the formation rules loosen. Article 2 of the UCC, as enacted in each state, allows a contract to form even though some terms are left open, provided the parties intended to make a contract and there is a reasonably certain basis for a remedy. A term sheet exchanged between two merchants that names quantity and shows agreement can be closer to a contract than the same document in a services deal.

Writing requirements cut the other way. Under UCC § 2-201, a contract for the sale of goods priced at $500 or more generally needs a writing signed by the party to be charged, subject to well-known exceptions for merchant confirmations, specially manufactured goods, admissions in litigation, and part performance. Other categories — land, suretyship, agreements not performable within a year — fall under each state's statute of frauds. A signed LOI can sometimes satisfy those writing requirements even though the parties thought they were only sketching a deal. Signature method rarely helps you escape: an emailed and electronically signed term sheet is generally as effective as ink, a point covered in our guide to electronic signatures and online contract formation.

Quick answers

Does writing "non-binding" at the top protect me?

Partly. A clear global disclaimer helps, but courts read specific clauses against it. If paragraph 7 says a party "shall not" negotiate with others for 45 days, that paragraph is likely enforceable regardless of the heading. Protect yourself by naming which numbered paragraphs bind and which do not, rather than relying on a single sentence to cover a document that contains obligations.

Is a term sheet different from a letter of intent?

Not legally. "Term sheet" usually describes a bulleted list of economic terms, common in financings; "letter of intent" usually describes a letter-format document, common in acquisitions and real estate; "memorandum of understanding" is often used between institutions. All three are judged the same way — by their content and the parties' objective intent, not by their title.

Can I be sued for walking away from an LOI?

You can be sued for breaching its binding provisions — shopping the deal during exclusivity, disclosing confidential information, or refusing to pay agreed expenses. Whether you can be sued for simply ending negotiations depends on your governing state's treatment of good-faith negotiation duties, and on whether the LOI expressly permits either side to terminate discussions at will.

Should a small business bother with one at all?

For a straightforward purchase where a definitive contract can be signed quickly, an LOI often adds delay without value. It earns its keep when diligence will be expensive, when third-party consents or financing are needed, or when several decision-makers must approve before lawyers are engaged. General planning material for owners is collected by the U.S. Small Business Administration.

Before you sign

Read the document clause by clause and mark each one binding or not, ignoring the heading. Move confidentiality and exclusivity into a clearly labeled binding section and price the exclusivity period like the concession it is. Add an expiration date, a walk-away right, and a governing-law clause so a collapse does not become a jurisdictional dispute. Then stop performing until the definitive agreement is signed, because conduct is what most often converts a "non-binding" document into a contract. If the deal involves equity, layer the LOI against the terms already fixed in your founder agreement, and for the neighboring questions of drafting, breach, and closing, continue through the Business Formation & Contracts pathway.