As deal activity picks up following the summer months, buyers may be eager to identify targets, submit offers, and move quickly toward closing. That momentum can be valuable, but it can also create a costly misconception: that the transaction begins when the letter of intent, or LOI, is signed.
The signed LOI may be the first document that makes a potential transaction feel official, but its terms reflect decisions and assumptions that have already been made. Before proposing a price or structure, a buyer has typically formed an initial view of the target’s assets, liabilities, operations, contracts, regulatory posture, and financial performance. In an energy transaction, that assessment may also involve title, environmental exposure, plugging obligations, transportation commitments, joint operating agreements, and regulatory approvals.
Those assumptions influence valuation, deal structure, and the protections the buyer will need. If they are incomplete or incorrect, the buyer may enter negotiations from a position that becomes difficult to revise without appearing to retrade the deal.
In short, a buyer who treats the LOI as a routine summary of commercial terms may therefore limit its options before negotiation of the definitive agreement and due diligence even begins. By contrast, a buyer who approaches the pre-LOI period strategically can enter negotiations and diligence with a clearer understanding of the target, a more appropriate transaction structure, and greater flexibility to respond when issues surface.
Early Terms Can (and Often Will) Shape the Entire Deal
The pressure to submit an attractive proposal can cause buyers to defer important legal questions. That may help generate initial interest from a seller, but it can also reduce the buyer’s leverage later.
Before the LOI is delivered, buyers should consider:
1. Transaction structure. An asset purchase, equity purchase, or merger can create significantly different liability, consent, tax, and operational consequences.
2. Price mechanics. A headline purchase price may be less important than adjustments, assumed obligations, working capital treatment, earnouts, and other economic terms.
3. Known risk areas. Potential title defects, environmental concerns, regulatory issues, change-of-control provisions, or pending disputes may warrant additional due diligence or different pricing.
4. Closing dependencies. Financing, third-party consents, regulatory approvals, transition services, and management retention may affect the parties’ ability to meet the proposed timeline realistically.
Once the seller has accepted the general framework, changing these positions may be perceived as retrading. Even when the buyer has a legitimate reason for the change, the request can create distrust, invite competing bids, or threaten the transaction.
Not Every LOI Provision Is Nonbinding; Be Intentional About What Is and What Isn’t
This is key.
Many LOIs state that the proposed transaction remains subject to due diligence and the execution of a definitive purchase agreement. However, certain provisions may be intended to bind the parties immediately, including confidentiality, exclusivity, expense allocation, access to information, governing law, and restrictions on public announcements. And the distinction should be deliberate and clearly drafted.
Texas courts place substantial weight on the parties’ written language and freedom to define when contractual obligations arise. The Texas Supreme Court has enforced express conditions stating that parties would not be bound or enter into a particular legal relationship until specified approvals or definitive documents were obtained.
That makes the wording of the LOI important, but it also reinforces a broader point: buyers should decide what they are prepared to commit to before the document is signed.
An exclusivity provision, for example, can give a buyer valuable time to investigate the target without competitive pressure. But an exclusivity period that is too short may expire before environmental, title, regulatory, or financial diligence can be completed. An aggressive closing target may make the offer more attractive, but it can also create pressure to accept unresolved risks or waive important conditions.
Involve Buy-Side Counsel Early to Identify Targeted Issues and Build Leverage
Involving buy-side counsel before the LOI does not require turning preliminary discussions into a full due diligence process. The objective is narrower and more strategic: identify the issues that should influence the buyer’s offer before the basic economic and legal framework becomes difficult to change.
Counsel can help the buyer evaluate whether the proposed transaction structure aligns with its objectives, identify likely third-party consents and regulatory approvals, and flag industry-specific risks that may affect valuation or timing. In an energy transaction, those issues may include title deficiencies, environmental liabilities, plugging obligations, midstream commitments, joint operating agreements, change-of-control provisions, and limitations on the transfer of permits or contracts.
Identifying these matters early allows the buyer to address them in the LOI through appropriate assumptions, conditions, diligence rights, timelines, or pricing mechanisms. It also helps the buyer avoid making an attractive proposal based on terms that may prove unrealistic once the target’s records and operations are examined more closely.
Early legal involvement also makes the eventual diligence process more effective. Rather than beginning with a generic checklist after exclusivity has started, the buyer can enter the process with focused priorities, a realistic timetable, and a clearer understanding of which findings could affect price, structure, or the decision to proceed.
That preparation creates leverage before the buyer needs it. It gives the buyer a stronger basis for its initial position and reduces the risk that a later request for additional protections will be characterized as retrading.
Conclusion: The Best Time to Protect the Deal Is Before the LOI
The strongest buyers are not simply the buyers who move fastest. They are the buyers who know which questions must be answered before committing to the transaction’s fundamental terms.
A well-developed LOI can present a compelling offer while preserving the buyer’s ability to investigate the target, respond to material findings, and negotiate an appropriate definitive agreement. An LOI built on incomplete assumptions can leave the buyer with far less attractive options: accept unexpected risk, attempt to revise previously agreed terms, waive important conditions, or walk away after investing substantial time and expense.
The issues buyers anticipate at this stage are often the same ones that resurface later in negotiations, diligence, and the final days leading to closing when there is far less room to negotiate around them.
At RR&A, we help buyers evaluate transaction risks, structures, and negotiating positions before the LOI defines the boundaries of the deal. Deal season may be here, but the best time to involve transaction counsel is before negotiations accelerate. Reach out to RR&A today to position your next acquisition for a more efficient and successful closing.
Disclaimer: The information and material on this website is general information about our practice and firm. This information does not offer specific legal advice and the use of this information does not create an attorney-client relationship with RR&A or any of its attorneys. The information on this website should not be used for legal advice, and persons should not act upon the information on this website without engaging professional legal counsel.
Miguel is an Associate at R. Reese & Associates and is part of the Estate Planning, Title, Transactions, and Commercial Real Estate teams. To learn more about Miguel, visit his attorney page.
