The letter of intent (commonly referred to in deal jargon as a "Letter of Intent" or "LOI") is a key milestone in the business sale process. Its purpose is to formalize the parties' commitment to reaching an agreement, even though not all terms have been fully settled. It therefore often serves as the tipping point between early non-binding discussions on the one hand and the final execution phase of the transaction on the other.
When should a Letter of Intent be signed?
There is no fixed rule. Some buyers prefer to formalize their offer via an LOI to give it a more official character. Quite often, the M&A advisory firm proposes a Letter of Intent once the parties begin to concretely envision carrying out the transaction.
What is the benefit of signing a Letter of Intent?
It is worth noting that an LOI is not mandatory; the parties can perfectly well choose to proceed directly to drafting the definitive share/asset purchase agreement (SPA). However, the purchase agreement usually involves lengthy and complex negotiations between lawyers, making it very helpful to set ground rules early on. The Letter of Intent enables the parties to establish initial mutual commitments while still allowing for the possibility that the deal might not close.
What is the legal standing of a Letter of Intent?
An LOI can be more or less binding depending on the wording chosen. In principle, an LOI allows either party to walk away. Nevertheless, the intent to complete the transaction is made clear, making it primarily a moral commitment between the parties. That said, certain firm, legally binding covenants are typically included in the LOI—specifically targeted terms designed to facilitate the deal process:
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Confidentiality undertaking: As long as the sale remains unconfirmed, it is critical to operate with discretion.
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Exclusivity period: This protects the buyer from competing bids and gives them the comfort needed to incur higher expenses, particularly for due diligence audits.
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Duty of information and cooperation: The seller commits to keeping the buyer informed regarding ongoing operations and business activities, while the buyer keeps the seller updated on the progress of their financing application and due diligence review.
What other provisions should a Letter of Intent contain?
Here too, parties enjoy considerable freedom. The key elements typically found in an LOI include:
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Description of the transaction scope: Entity details, partial vs. full acquisition, share vs. asset structure, class of equity units, etc.
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Price and payment terms: Financial arrangements and funding structure. Obtaining bank financing is frequently included as a condition precedent (condition suspensive).
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Representations and Warranties (garanties d’actif et de passif): It is prudent to outline the general framework of the indemnity coverage that will later be detailed in the SPA—liability caps, baskets/thresholds, survival periods, and guarantee types.
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Interim period & closing timeline: Roadmap of steps to be completed (securing debt, conducting due diligence, preparing final documentation) prior to closing, complete with a drop-dead date after which either party regains full freedom if the sale fails to materialize.
The Letter of Intent thus establishes the primary terms that will be detailed in the definitive purchase agreement. The more comprehensive the LOI, the smoother the final discussions leading up to closing will be. It is therefore advisable to go as far into the specifics as possible when negotiating the LOI—if negotiations are going to stall, it is better to discover that early on.
Even though a Letter of Intent is largely non-binding, it is usually followed by an actual transaction. This document reassures the parties and serves as proof to third parties (lending institutions, minority shareholders, etc.) that negotiations are well advanced. Ultimately, the non-binding nature of the LOI reassures both buyer and seller, allowing them to advance step-by-step through the sale process and build mutual trust along the way.
