The LOI in Mergers & Acquisitions

In a business sale or acquisition process, the Letter of Intent (LOI) is a key milestone. It formalizes a buyer’s interest and sets the basis for negotiations before the definitive agreement is signed.

What is an LOI in M&A?

The LOI (Letter of Intent) is a document signed between abuyer and a seller that:

• expresses the buyer’s serious interest in the company,
• defines the main terms of the contemplated transaction,
• organizes the next steps of the process (due diligence, exclusivity, timeline, etc.).

⚠️ Important: an LOI is generally not abinding commitment to complete the transaction.It frames aphase of in-depth review and negotiation.

Where does the LOI fit in a sale process?

The LOI comes after the initial information-sharing stages.Typical process:

1. Anonymous teaser of the company
2. Signature of an NDA (confidentiality agreement)
3. Transmission of detailed information
4. Access to the data room
5. Signature of an LOI
6. In-depth due diligence
7. Negotiation of the definitive agreement (SPA)
8. Signing and closing

In a process run by an intermediary (investment bank), several buyers may compete until the LOI stage.

The key role of exclusivity

The LOI generally establishes an exclusivity period:

• the seller ceases discussions with other buyers,
• the selected buyer is granted reserved time to analyse the company,
• negotiations progress on a privileged basis.

The seller may receive several LOIs and then select one to proceed.

The LOI is not a guarantee of transaction

One essential point to understand:👉 more than half of LOIs do not result in an acquisition.The LOI signals serious intent, but not a definitive commitment.

Why might an LOI not lead to completion?

Several common causes:

1. Change in company performance

During due diligence, the situation may evolve:

• stronger growth than expected → price disagreement,
• operational difficulties → buyer withdrawal.

2. Disagreements on key terms

Examples:

• valuation,
• scope of the transaction,
• representations and warranties,
• management retention period,
• payment structure.

3. Buyer financing issues

Financing is often a condition precedent.

4. Deterioration of the human relationship

A frequently underestimated but decisive factor.

Consequences of an LOI that does not complete

The main cost is time lost:

• discussions and negotiations,
• preparation and review of documents,
• due diligence,
• management involvement.

The seller is often most affected:

• significant management time commitment,
• disclosure of sensitive information,
• possible performance decline during the process.

If the LOI fails:

• the seller may resume the process with other buyers,
• or abandon the sale project.

Key elements of an LOI

1. Transaction scope

• percentage of equity sold (70%, 100%, etc.),
• subsidiaries included,
• assets excluded if any.

2. Indicative valuation

Often based on:

• an EBITDA multiple,
• or a target enterprise value.

The LOI may provide for adjustment based on future accounts (between signing and closing).

3. Payment structure

Examples :

• cash at closing,
• earn-out,
• amount held in escrow (warranty).

4. Acquisition financing

The buyer generally describes :

• equity,
• bank debt,
• financial partners.

Management retention

The LOI often specifies :

• duration of the seller’s presence after closing,
• operational role,
• incentive mechanisms.

Examples :

• minority reinvestment,
• earn-out,
• clauses de « bad leaver ».

👉 A bad leaver clause penalizes the manager if they leave the company prematurely.

Representations and warranties

A central M&A topic.The LOI generally indicates:

• the principle of the warranty,
• percentage of price covered,
• warranty duration,
• escrow amount.

Due diligence

The LOI provides for the audit phase:

• financial,
• legal,
• tax,
• HR,
• operational.

Objective for the buyer: verify that reality matches the information received.

Conditions precedent

They allow the buyer to withdraw if certain conditions are not met:

• financing obtained,
• absence of material adverse change,
• satisfactory audit results,
• regulatory approvals if applicable.

Seller protection clauses

Non-solicitation

The buyer undertakes not to poach the seller’s employees.

Enhanced confidentiality

Protection of sensitive information disclosed.

The exclusivity clause

A central LOI clause :

• limited duration (often 1–3 months),
• prohibition for the seller to negotiate elsewhere,
• objective: finalize the transaction.

If the deal fails after exclusivity, the seller may resume the process.

Break-up fees

In principle, the LOI is non-binding as to completion.However,some LOIs provide for:

• break-up fees,
• expense reimbursement,
• penalties in case of wrongful withdrawal.

These provisions are negotiable.

The human dimension: a decisive factor

Beyond numbers, transaction success depends heavily on:

• quality of the relationship,
• strategic alignment,
• mutual trust.

Many transactions fail not for financial reasons, but relational ones.This is particularly true if the seller remains involved after closing.

LOI vs definitive agreement (SPA)

The LOI :

• sets out the principles,
• remains general,
• is not exhaustive.

The definitive agreement (SPA):

• legally binding,
• highly detailed,
• finalizes the transaction.

The LOI creates a privileged framework to reach the SPA.

Conclusion: what is the LOI really for?

The LOI is a strategic tool that enables parties to:

• formalize serious intent,
• align buyer and seller,
• organize due diligence,
• secure exclusivity,
• prepare the final transaction.

But it does not guarantee completion.👉 Carefully selecting the counterparty and aligning on fundamentals at the LOIs tage is essential to maximize the chances of success.

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