Non-binding Letter of Intent

Somewhere between "we like this company" and "here is the cheque" there has to be a piece of paper. The non-binding Letter of Intent is that paper.

After the fund has signed a non-disclosure agreement and completed initial due diligence, it writes to the target's management team setting out what it proposes: how much money, at what valuation, for what percentage of the company. The amount is usually expressed as a range rather than a specific value, because the fund has not yet seen the confidential information that would let it commit to a number.

Non-binding means exactly that. Neither side is contractually obliged to proceed. What the LOI buys is a shared basis for the negotiation that follows.

Chapter 9 places the LOI at the fourth step of the private equity deal pipeline, and the sequence is examinable in its own right:

Two things follow from the ordering. The LOI is before access to confidential information — which is why the number is a range. And the term sheet, not the LOI, is where binding obligations start, though even the term sheet mixes binding and non-binding clauses.

The context is a funnel: a private equity firm typically analyses 40 to 50 investee companies before making one investment. Most deals die well before an LOI is written.

A Category II AIF running a growth-capital strategy has spent six weeks on a warehousing and cold-chain company. Initial diligence is done; the confidential data room is not yet open.

The fund issues a non-binding LOI:

The founders accept, and the parties sign a term sheet and a Summary of Principal Terms. Final due diligence then turns up Rs 34 crore of receivables from a single distributor that has not paid in 14 months and was not disclosed earlier.

Because the LOI was non-binding, the fund is free to reprice. The Final Investment Memorandum goes to the investment committee at Rs 118 crore for 21 per cent at a pre-money valuation of Rs 444 crore — and the founders, who may still negotiate at this stage, are choosing between that and restarting a process that took six months.

Had the fund written a specific Rs 140 crore rather than a range, the conversation would have started from a number it no longer believed.

Chapter 9 (Investment Strategies), section 9.1.3.2 (Private equity deal structure), which lists the deal pipeline. Expect a sequencing question — which document comes before which — and a question on why the LOI amount is given as a range. The other reliable question is which document actually binds: the term sheet and SOPT, not the LOI.

• The LOI is not the term sheet. The LOI proposes; the term sheet, signed after the LOI is accepted, sets out binding and non-binding clauses. Both come before any money moves.
• The amount is a range, deliberately. A question offering "a specific investment amount" as the LOI's content is testing this.
• Final due diligence comes after the term sheet, not before. Initial diligence is what precedes the LOI.
• The Final Investment Memorandum follows investment committee approval and proposes a specific valuation — and the target can still negotiate it.
• Nothing in steps 1 to 7 puts the investor on the capitalization table. That happens at step 8, on signing the Shareholders' Agreement and Share Subscription Agreement.
• "Non-binding" rarely means the whole letter. Confidentiality, exclusivity and costs clauses are commonly binding even inside a non-binding LOI.