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 ofIntent) 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:
- Anonymous teaser of the company
- Signature of an NDA (confidentiality agreement)
- Transmission of detailed information
- Access to the data room
- Signature of an LOI
- In-depth due diligence
- Negotiation of the definitive agreement (SPA)
- Signing and closing
In a process run by an intermediary (investmentbank), several buyers may compete until the LOI stage.
The key role of exclusivity
The LOI generally establishes an exclusivityperiod:
- 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 timelost:
- 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 futureaccounts (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 sellermay resume the process.
Break-up fees
In principle, the LOI is non-binding as tocompletion.
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 reachthe SPA.
Conclusion: what is the LOI really for?
The LOI is a strategic tool that enables partiesto:
- 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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