Letter of intent guide

What an LOI does in a cannabis deal

An LOI settles the commercial deal before anyone pays for a 60-page contract. It is the buyer’s written offer: price, how it is paid, what is being bought, the main conditions, and a timetable. If the parties cannot agree on two pages, they will not agree on sixty.

A cannabis lawyer writing in May 2025 listed the common LOI failures in this industry: recycled templates, unclear binding status, ignoring cannabis regulatory requirements, and leaving out material terms other than price. Each one leads to a renegotiation after signing, and renegotiations kill deals.

An LOI comes after the NDA and an initial evaluation of the business, and before full due diligence.

Which parts of an LOI are binding?

The usual split, per a widely used M&A practice guide:

Usually non-binding	Usually binding
Purchase price and payment terms	Confidentiality
Deal structure	Exclusivity
Conditions to closing	Due diligence access
Proposed timetable	Deposit terms
Transition and employment terms	Who pays which expenses
	Governing law and expiry date

Say so expressly, section by section. Courts have enforced obligations that parties thought were soft. In SIGA Technologies v. PharmAthene, decided on 24 May 2013, the Delaware Supreme Court held that a promise to negotiate in good faith in line with a term sheet was enforceable even though the term sheet was marked non-binding, and that expectation damages were available where the parties would have reached agreement but for one side’s bad faith. The practical lesson for a buyer: do not sign an LOI on terms you plan to retrade, and do not agree to a “good faith” clause without meaning it.

The core commercial terms

Price and how it is paid. Cash at closing, seller note, earn-out, equity, and escrow holdbacks, each with amounts. For a seller note, state rate, term, amortisation, and security. For how each form of consideration compares, see cash vs stock vs seller note.

What is being bought. Assets or equity. In cannabis this is not only a tax choice. Some states will not move a licence to a new entity, which forces an equity purchase, and that means inheriting the entity’s liabilities. Decide this in the LOI; see asset sale vs membership-interest sale.

Inventory and working capital. Whether inventory is included in the price or paid for separately at cost, how it is counted, and what is excluded, such as aged or failed product. See inventory and biomass at closing.

Real estate. Lease assignment, new lease from the seller, or purchase of the building, with headline terms.

Seller’s role after closing. Length of transition, non-compete scope, and any ongoing employment.

Diligence period and access. Length, what records will be provided, and access to tracking-system data and key staff.

Cannabis-specific terms that belong in the LOI

These are the points generic templates miss.

1. Regulatory approval as a condition. State that closing, or the transfer of control, is conditional on written approval from the state regulator and any local authority. Name the agencies. The mechanics are in regulatory-approval contingencies.
2. Who files what, and when. The buyer prepares ownership disclosures; the seller signs what the state requires and keeps the licence in good standing. Set a target filing date measured from signing the purchase agreement.
3. Buyer qualification. A short statement that each buyer principal will submit to background review, and what happens if one is rejected, including any right to substitute.
4. Interim operations. The seller runs the business in the ordinary course until approval. If the buyer will be involved earlier, say that it will be under a disclosed, compliant management services agreement and only where state rules allow it. Taking control early without approval is a violation that can cost both sides the licence.
5. Staged closing. Whether money goes into escrow at signing and is released on approval. See staged closings and escrow pending approval.
6. Funding disclosure. Some states must approve funders before money moves. Washington, for example, requires a licensee to apply before accepting funds from a new financier. An LOI deposit paid to the seller’s business rather than to escrow can trip that rule.
7. Tax and compliance holdback. Flag in the LOI that part of the price will be held back for unpaid excise, sales, or income tax and open violations. Sellers take it better at this stage than in the final draft.
8. Outside date. A date after which either side can walk if approval has not come, with a mechanism to extend.

How long should exclusivity last?

General M&A guidance puts exclusivity at 30 to 90 days, with buyers asking for 45 to 90 and sellers pressing for 30 to 45.

Cannabis adds a wrinkle. State approval can take far longer than any exclusivity period, so exclusivity under the LOI should cover only the stretch from LOI to a signed purchase agreement. Once the purchase agreement is signed, it binds the seller through the approval wait. A workable pattern:

• 45 to 60 days of exclusivity for diligence and drafting.
• An automatic extension of 15 to 30 days if the buyer is proceeding in good faith and has delivered a first draft of the agreement.
• Early termination if the buyer proposes a lower price without a diligence finding to justify it.

The full sequence is laid out in cannabis sale timeline: LOI to close.

Deposits

The same practice guide suggests about 5% for smaller transactions and $50,000 to $250,000 for larger ones, and notes that deposits are less common in mid-sized deals. In cannabis, three details matter more than the amount:

• Who holds it. Many escrow companies and title agents will not handle cannabis-related funds. Identify one that will before you sign.
• When it goes hard. Refundable through diligence. After that, refundable if the regulator or city refuses approval for reasons not caused by the buyer.
• What it is credited against. The cash due at closing.

Illustrative term summary

An example of the level of detail to aim for. The figures are invented to show format only.

Term	Example
Buyer and seller	Named entities and their principals
Structure	Purchase of 100% of membership interests
Price	$1,800,000: $1,100,000 cash at closing, $500,000 seller note, $200,000 escrow holdback for 18 months
Seller note	5 years, 9% interest, monthly payments, secured as state law permits
Inventory	Included up to $120,000 at cost; excess paid at cost; product older than 120 days excluded
Deposit	$50,000 to neutral escrow; refundable during diligence and on regulatory denial
Diligence	45 days from delivery of requested records
Exclusivity	60 days, binding
Conditions	State and city approval of change of ownership; landlord consent; no material adverse change
Interim period	Seller operates in ordinary course; no buyer control before approval
Outside date	9 months from signing the purchase agreement, extendable by 90 days
Transition	Seller available 20 hours a week for 60 days after closing
Binding sections	Confidentiality, exclusivity, deposit, expenses, governing law

Mistakes buyers make with LOIs

• Offering a headline price before understanding after-tax cash flow, then trying to cut it later.
• Leaving structure open. “Asset or equity to be determined” postpones the hardest conversation.
• Agreeing to a non-refundable deposit with no carve-out for regulatory denial.
• Forgetting the landlord. Consent can take as long as the city.
• Signing a seller’s broker’s template without cannabis terms.

This is general education, not legal advice. Enforceability of LOI terms varies by state, so have counsel in the governing-law state review the document before you sign.