The LOI in mergers and acquisitions
In a business sale or acquisition process, the letter of intent (LOI) is a key step. It formalises a buyer's interest and lays the foundations for the negotiation before the final signing.
What is an LOI in M&A?
The LOI (Letter of Intent) is a document signed between a buyer and a seller that:
- expresses the buyer's serious interest in the company,
- defines the main terms of the envisaged deal,
- organises the rest of the negotiations (due diligence, exclusivity, timetable…).
Important: the LOI is generally not a firm commitment to complete the transaction. It frames a phase of in-depth study and negotiation.
Where does the LOI sit in a sale process?
The LOI comes after the first phases of information exchange. A typical process:
In a process organised by an intermediary (investment bank), several buyers may compete up to the LOI.
The key role of exclusivity
The LOI generally allows an exclusivity period to be put in place:
- the seller stops negotiating with other buyers,
- the selected buyer has reserved time to analyse the company,
- discussions move forward on a privileged basis.
The seller may receive several LOIs and then choose the one to proceed with.
The LOI is not a guarantee of a transaction
One of the essential points to understand: 👉 more than half of LOIs do not lead to an acquisition. The LOI marks serious interest, but not a final commitment.
Why might an LOI not succeed?
Several common causes:
Change in the company's performance
During due diligence, the situation can change:
- stronger growth than expected → disagreement on the price,
- operational difficulties → withdrawal of the buyer.
Disagreements on key terms
Examples:
- valuation,
- scope of the sale,
- representations and warranties,
- handover period of the manager,
- payment structure.
Buyer's financing problem
Financing is often a condition precedent.
Deteriorated human relationship
This factor is often underestimated but decisive.
The consequences of a failed LOI
The main cost is lost time:
- exchanges and negotiations,
- preparation and analysis of documents,
- due diligence,
- payment structure.
The seller is often the most impacted:
- strong mobilisation of the manager,
- sharing of sensitive information,
- possible drop in performance during the process.
If the LOI fails:
- the seller can resume the process with other buyers,
- or abandon their sale project.
The essential elements of an LOI
The scope of the deal
- percentage of capital sold (70%, 100%, etc.),
- included subsidiaries,
- any excluded assets.
The indicative valuation
Often based on:
- an EBITDA multiple,
- or a target enterprise value.
The LOI may provide for an adjustment based on future accounts (between signing and closing).
The payment structure
Examples:
- cash payment at closing,
- price supplement (earn-out),
- amount placed in guarantee (warranty escrow).
Financing of the acquisition
The buyer generally describes:
- equity,
- bank debt,
- financial partners.
The manager's handover
The LOI often specifies:
- the length of the manager's presence after the sale,
- their operational role,
- the incentive mechanisms.
Examples:
- retention of a minority stake,
- earn-out,
- "bad leaver" clauses.
👉 A bad leaver clause penalises the manager if they leave the company too early.
Representations and warranties (GAP)
A central topic in M&A. The LOI generally indicates:
- the principle of the warranty,
- the percentage of the price covered,
- the duration of the warranty,
- the escrowed amount.
Due diligence
The LOI provides for the audit phase:
- financial,
- legal,
- tax,
- social,
- operational.
The buyer's objective: to verify that reality matches the information received.
Conditions precedent
They allow the buyer to withdraw if certain conditions are not met:
- obtaining financing,
- absence of a significant change,
- validation of the audits,
- any regulatory approvals.
The seller's protection clauses
Non-solicitation
The buyer undertakes not to poach the seller's employees.
Enhanced confidentiality
Protection of the sensitive information shared.
The exclusivity clause
The central clause of the LOI:
- limited duration (often 1 to 3 months),
- prohibition for the seller to negotiate elsewhere,
- objective: to finalise the transaction.
If the deal fails after exclusivity, the seller can resume the process.
Break-up penalties
In principle, the LOI is not binding on the conclusion. But some LOIs provide for:
- break-up fee,
- reimbursement of costs,
- penalty in case of abusive withdrawal.
These clauses are negotiable.
The human dimension: a decisive factor
Beyond the numbers, the success of a deal depends heavily on:
- the quality of the relationship,
- strategic alignment,
- mutual trust.
Many transactions fail not for financial reasons, but relational ones. This is particularly true if the manager stays in the company after the sale.
LOI vs final contract (SPA)
The LOI
- sets out the principles,
- remains general,
- is not exhaustive.
The final contract (SPA)
- legally binding,
- very detailed,
- finalises the transaction.
The LOI creates a privileged relationship to reach the SPA.
Conclusion: what is the LOI really for?
The LOI is a strategic tool that allows you to:
- formalise serious interest,
- align seller and buyer,
- organise due diligence,
- secure exclusivity,
- prepare the final transaction.
But it does not guarantee the sale. 👉 Choosing the right partner and validating the fundamentals from the LOI stage is essential to maximise the chances of success.
Frequently asked questions about the LOI
What is a letter of intent (LOI) in M&A?
It is a document signed between a buyer and a seller that expresses serious interest, defines the main terms of the deal and organises the rest of the negotiations (due diligence, exclusivity, timetable). It is generally not a firm commitment to conclude.
Is the LOI legally binding?
In principle not on the conclusion of the sale, but some clauses are (exclusivity, confidentiality, non-solicitation) and some LOIs provide for break-up penalties. The final contract (SPA), however, is fully binding.
What is the difference between an LOI and an SPA?
The LOI sets out the principles and remains general; the SPA (final contract) is legally binding, very detailed and finalises the transaction.
Why do many LOIs not succeed?
More than half do not succeed: change in performance during due diligence, disagreements on key terms, buyer financing problems or a deteriorated human relationship.
Secure your letter of intent
From the LOI to closing, Collaboration Capital supports you in structuring, negotiating and securing your sale or acquisition deal.
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