The letter of intent (LOI), explained

The letter of intent, or LOI, is the first written document of an acquisition. You send it to the seller after the early discussions, once you have seen enough numbers to picture the deal but before you have verified everything. It says three things: at what price and on what terms you intend to buy, what you expect from the seller during the rest of the process, and the timeline to signing. Many buyers treat it as a polite formality, a note of good intentions exchanged between serious people. That is a mistake, and it gets paid for later. The LOI is the moment you carry the most weight in the negotiation, simply because the seller has not yet picked their buyer. Anything you fail to set now, you will pay to get later, or you will not get at all.

What an LOI is really for

An LOI does four jobs. First, it aligns both sides on price and structure before either spends money on advisers for due diligence: there is no point paying lawyers and accountants over a valuation gap that will never close. Second, it buys you exclusivity: the seller commits not to negotiate with others for a defined period, which justifies your investing time and money in the checks. Third, it organizes access to information: the list of documents you expect, the timeline, the people to deal with. Finally, it sets the conditions precedent, the exits that let you walk away without penalty if reality does not match what was sold to you.

What binds you, and what does not

This is the most misunderstood point. An LOI is generally largely non binding on the commercial essentials: price, scope and structure remain intentions, subject to confirmation after due diligence and negotiation of the final contract. Some clauses, however, are fully binding from the moment of signing, and the seller can enforce them in court. You need to know exactly which ones, and to say so in the text. A well drafted LOI separates the binding clauses from the intentions in black and white, so neither side thinks itself bound on what is not, nor free on what is.

• Usually binding: exclusivity, confidentiality, each side bearing its own costs, the governing law and jurisdiction, and sometimes a non solicitation clause on staff and customers.
• Usually non binding: the price, the payment structure, the exact scope of assets, the warranties expected, and the very fact of completing the deal.
• Always clarify: state explicitly, in a dedicated clause, which sections are binding and which are not. That sentence is what prevents disputes.

The clauses that decide everything

An LOI comes down to a handful of structural decisions. Take the time to set them, because they define the playing field for the whole negotiation to come.

• The price and its basis: state an enterprise value, and specify it is on a cash free, debt free basis, with a normative level of working capital to be defined. Without that, the headline price means nothing.
• The payment structure: cash portion, seller note, possible earn out. The more you defer and condition payment, the more you protect yourself against a reality less attractive than the file.
• Exclusivity: a realistic duration, often sixty to ninety days, enough to close due diligence and financing without locking yourself in indefinitely.
• Conditions precedent: securing financing, satisfactory due diligence, transfer of key contracts, landlord consent, no material adverse change. Each one is an exit.
• The timeline: dated milestones to signing, so the process does not drift to the seller’s advantage.
• The treatment of costs: who pays what if the deal fails, and the absence of any break fee on your side while the LOI stays non binding on substance.

The price in an LOI is not a price. It is a ceiling that due diligence will only confirm or lower. Never set it without reserving the right to revisit it.

A worked example

Picture a services company whose normalized EBITDA comes out at 1 million euros. You offer an enterprise value of 5 million euros, a five times multiple, paid as 3.5 million in cash, 1 million as a seller note over three years, and 500,000 euros of earn out tied to retaining the main customers. You ask for ninety days of exclusivity and condition the offer on securing your bank financing and on due diligence confirming the EBITDA level. Three months later, the checks reveal that 200,000 euros of EBITDA came from a contract that was not renewed. Real EBITDA is 800,000 euros. Because your price was a conditional intention, not a commitment, you renegotiate the value to 4 million without breaking the deal, or you trigger your condition precedent and walk away with no penalty. Had you signed an LOI binding on price, you would have paid for the phantom contract.

Exclusivity, your best lever

Exclusivity is the counterpart of your investment in the process. Without it, the seller can use your offer as a stalking horse to drive up the bidding elsewhere, and you end up funding due diligence that benefits a rival. I have watched a buyer pay for three weeks of audit only to learn the seller was negotiating in parallel, then walk away empty handed. So ask for a period long enough to complete checks and financing, but not open ended: run it too long and it works against the seller and makes the deal harder to reach. Plan too for the case where one side drags its feet. An exclusivity that keeps running while the seller is slow to hand over documents works against you, so tie its duration to the actual delivery of information.

The conditions precedent you must never skip

Conditions precedent are your exits. Each one matches a risk you refuse to take blind. A serious LOI lists them clearly, because they are what let you walk away with your head held high if reality differs from the file.

• Financing: the offer is conditional on securing an acquisition loan on acceptable terms. Without this clause, you commit to a price you may not be able to fund.
• Satisfactory due diligence: you reserve the right to revise or withdraw the offer if the financial, tax, employment and legal checks reveal material gaps.
• Key contracts and customers: effective transfer of decisive contracts, landlord consent, agreement of the partners on whom value depends.
• No material adverse change: protection against the business deteriorating between the LOI and signing.
• Owner exit and transition: agreement on the length and terms of the seller’s handover support, especially if the business still depends on them.

The mistakes that cost dearly

The LOIs that fail almost always fail for the same reasons, and I see them come back deal after deal. First: setting a precise price while knowing nothing of the real numbers, which forces you either to defend it tooth and nail or to look careless when you cut it. Second: neglecting the clause that separates binding from non binding, and ending up bound without meaning to. Third: accepting short or vague exclusivity, which lets the seller keep other irons in the fire while you pay for due diligence. Fourth: forgetting to define the normative level of working capital, which lets the seller drain operating cash before closing. Fifth, the most common among first time buyers: mistaking a friendly LOI for a good one. A pleasant text that protects you against nothing is worth nothing.

A solid LOI does not write itself: it follows from a clear reading of the target’s numbers and risks. That is exactly the work we set out in our guide to analyzing an acquisition of SMEs and startups, work our acquisition support helps you complete before you put any price in writing. The LOI is the moment your analysis turns into negotiating power. Take the time to build it: it is the cheapest and the most decisive document of the whole acquisition.

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