The Letter of Intent — sometimes called a Term Sheet or Heads of Agreement — is typically the first formal document in a transaction that goes beyond the NDA. It records the agreed deal parameters between buyer and seller before the full Sale and Purchase Agreement is drafted. In my experience, sellers often approach the LOI with relief ("we've agreed on price") when what they should feel is measured caution. The details in this document set the terms on which the next three to six months of your life will operate.
What an LOI Is — and Is Not
An LOI is primarily a non-binding document. This means that the price, deal structure, conditions, and most other commercial terms written into it do not legally bind either party to complete the transaction. Either party can walk away. This is intentional and appropriate — the buyer has not yet completed due diligence, and the seller has not yet reviewed a full SPA. Many things will change between LOI and completion.
However — and this is the part sellers frequently misunderstand — certain clauses in an LOI are binding. The document itself will specify which. Typically, the following clauses are expressed as binding:
Confidentiality. The buyer and their advisors agree to maintain confidentiality regarding the transaction and information received. This mirrors the earlier NDA but is restated in the LOI context.
Exclusivity. The seller agrees not to solicit or engage with other potential buyers for a defined period. This is the most commercially significant binding clause.
Break fee (where included). Either or both parties may agree that if they withdraw without cause, a penalty becomes payable. This is not universal in Malaysian transactions but appears in larger, more sophisticated deals.
Governing law. The LOI specifies that it is governed by Malaysian law and disputes are subject to Malaysian courts or arbitration. This clause is always binding.
Process terms. Agreed timelines, what materials the seller will provide, and who manages the data room. These administrative commitments are typically binding.
Exclusivity: The Clause That Costs Sellers Most
Exclusivity is the provision where sellers most commonly give away leverage they do not recover. Under an exclusivity clause, you agree to deal only with this buyer for a specified period — 30, 60, or 90 days is typical in Malaysian market practice. During that window, you cannot:
- Continue negotiations with any other interested party
- Solicit new buyers
- Accept competing offers that may arrive unsolicited
Important:
Exclusivity transfers negotiating power from seller to buyer at the moment you are weakest — after you have invested weeks of management time in the process and before you have seen the SPA. A well-advised buyer will use the exclusivity period to identify issues in due diligence and then request a price reduction. If your exclusivity is open-ended or contains automatic renewal provisions, you may find yourself locked out of the market for months while the buyer chips away at the agreed price. Negotiate a defined, fixed exclusivity period with no automatic renewal. If the buyer needs an extension, they must come back and ask for it — and you can require payment of a deposit or other consideration before granting one.
A reasonable exclusivity period for a Malaysian SME transaction is 60 days. This gives the buyer sufficient time to complete financial and legal due diligence on a properly prepared business. If the buyer requests 90 days or more upfront, push back — it typically indicates they are not well-organised or are treating your business as a lower priority.
What Sellers Should Insist On
Price and structure stated clearly. The LOI should state the headline price (enterprise value), the proposed consideration split (cash at completion, loan note, earnout), and the proposed structure (share sale or asset sale). Vague LOIs that say "subject to due diligence price will be determined" provide no benefit to the seller.
Deposit or good faith payment. For transactions above RM 5 million, it is reasonable to request a good faith deposit of 2–5% of the proposed enterprise value upon signing the LOI, refundable only if the seller defaults or the business is materially misrepresented. This filters buyers who are browsing from buyers who are committed.
Conditions precedent stated. The LOI should list the conditions that must be satisfied before completion: satisfactory completion of due diligence, regulatory approvals, financing being secured. If a condition is material, you want to know about it now — not six weeks into exclusivity.
Outside date. Fix a long-stop date. If the transaction has not completed by [specific date], either party may terminate without penalty. This prevents a buyer from stringing you along indefinitely while nominally staying in the exclusivity period.
What Buyers Should Watch For
Price adjustment mechanisms. Many LOIs include a completion accounts mechanism whereby the final price adjusts up or down based on the actual net working capital, net debt, and EBITDA at the completion date versus a normalised reference point. Buyers should ensure this mechanism is described in the LOI so there are no surprises in the SPA.
Warranty scope. While the full warranty schedule is in the SPA, the LOI sometimes includes a statement of the warranty regime (W&I insurance, cap, basket). Buyers who intend to negotiate extensive warranties should indicate this in the LOI rather than surprising the seller in the SPA.
Financing condition. If the buyer requires debt financing to complete the transaction, this must be expressed as a condition precedent in the LOI. Attempting to introduce a financing condition after signing (when it was not disclosed) is a significant breach of good faith and has reputational consequences in a market as relationship-driven as Malaysia.
What Happens After the LOI
Signing the LOI typically triggers the formal due diligence process. The buyer will engage lawyers, accountants, and potentially technical advisors. The seller should have a data room ready — or be prepared to populate one within two weeks of LOI signing.
The process from LOI to SPA signing typically takes 60–90 days for a well-prepared Malaysian SME transaction. Delays are almost always caused by: incomplete data room materials from the seller; due diligence findings that require investigation; financing delays on the buyer side; or structural negotiation around tax or employment.
After the SPA is signed, you move to completion — the actual transfer of shares or assets and payment of the purchase price. In straightforward transactions, completion can occur simultaneously with SPA signing (sign and close on the same day). Where regulatory approvals are required, completion may follow signing by weeks or months.
Key Takeaways
- An LOI is mostly non-binding on commercial terms, but certain clauses — exclusivity, confidentiality, governing law — are typically expressed as binding from the moment of signing
- Exclusivity is the most commercially significant binding clause; negotiate a fixed period (60 days is reasonable) with no automatic renewal
- Sellers should insist on: clearly stated price and structure, a good faith deposit for larger transactions, explicit conditions precedent, and an outside date
- Buyers should flag financing conditions in the LOI — introducing them later is a bad-faith move in the Malaysian market context
Related reading
NDA in M&A: What the Confidentiality Agreement Actually ProtectsBefore the LOI comes the NDA. Understanding what it covers — and what it does not — is the first layer of transaction protection.
Related reading
Share Sale vs Asset Sale: The Structural Decision That Changes EverythingThe LOI will specify the proposed structure. Understanding the implications before you sign is essential.