The letter of intent (LOI) in mergers and acquisitions
In any process to sell or buy a business, the letter of intent (LOI) — often called heads of terms in the UK — is a key step. It formalises a buyer's interest and lays the groundwork for negotiations before the definitive agreement is signed.
By Collaboration Capital · Updated
What is a letter of intent (LOI) in M&A?
The LOI (letter of intent) is a document signed by a buyer and a seller that:
- expresses the buyer's serious interest in the business,
- sets out the main terms of the proposed deal,
- organises the next stage of negotiations (due diligence, exclusivity, timetable, etc.).
Important: an LOI is generally not a firm commitment to complete the transaction. It frames a phase of in-depth review and negotiation.
Where does the letter of intent fit in a sale process?
The LOI comes after the initial exchanges of information. A typical process:
In a process run by an intermediary (an M&A adviser), several buyers may compete right up to the LOI stage.
The key role of the exclusivity period
The LOI generally sets up an exclusivity period (often one to three months):
- the seller stops negotiating with other buyers,
- the chosen buyer has dedicated time to analyse the business,
- discussions move forward on a preferential basis.
The seller may receive several LOIs and then choose which one to pursue. If the deal falls through after the exclusivity period, the seller can restart the process with other buyers.
A letter of intent does not guarantee a deal
One of the key points to understand: 👉 more than half of LOIs do not result in an acquisition. An LOI signals serious interest, not a definitive commitment.
Why an LOI may not lead to a deal
1. Changes in the company's performance
During due diligence, the situation can change:
- stronger growth than expected → disagreement on price,
- operational difficulties → the buyer withdraws.
2. Disagreements on key terms
- valuation,
- scope of the sale,
- warranties and indemnities,
- length of the owner's handover period,
- payment structure.
3. Buyer financing problems
Financing is often a condition precedent.
4. A breakdown in the relationship
This factor is often underestimated, yet decisive.
The consequences of a failed LOI
The main cost is lost time: discussions and negotiations, preparing and analysing documents, due diligence. The seller is usually the most affected:
- heavy demands on the owner-manager's time,
- sensitive information shared,
- a possible dip in performance during the process.
If the LOI fails, the seller can restart the process with other buyers, or abandon the plan to sell.
What does a letter of intent contain?
The essential terms
1. Scope of the transaction
- percentage of share capital sold (70%, 100%, etc.),
- subsidiaries included,
- any excluded assets.
2. Indicative valuation
Often based on an EBITDA multiple or a target enterprise value. The LOI may provide for a price adjustment based on future accounts (between signing and completion), for example through completion accounts or a locked box.
3. Payment structure
- cash paid on completion,
- deferred consideration (earn-out),
- an amount held in escrow, backing the warranties and indemnities.
4. Acquisition financing
- equity,
- bank debt,
- financial partners.
The owner-manager's handover
The LOI often specifies how long the owner-manager stays on after the sale, their operational role and the incentive mechanisms: a retained minority stake, an earn-out, bad leaver clauses.
👉 A bad leaver clause penalises the owner-manager if they leave the business too early.
Warranties and indemnities (garantie d'actif et de passif)
A central issue in M&A. The LOI usually sets out the principle of the warranty and indemnity package, the percentage of the price covered, its duration and the escrow amount that backs it.
Due diligence
The LOI provides for the due diligence phase: financial, legal, tax, employment and operational. The buyer's objective: to check that reality matches the information received.
Conditions precedent
They allow the buyer to withdraw if certain conditions are not met: obtaining financing, no material adverse change, satisfactory due diligence, any regulatory approvals.
LOI clauses that protect the seller
In addition to the exclusivity clause (see above), the LOI generally includes several protections for the seller.
Non-solicitation
The buyer undertakes not to poach the seller's employees.
Enhanced confidentiality
Protection of the sensitive information shared, in addition to the NDA signed earlier.
Break fees
In principle, an LOI is not binding as to completing the deal. However, some LOIs provide for a break fee, reimbursement of costs or a penalty if a party withdraws in bad faith. These clauses are negotiable.
The human factor: often decisive
Beyond the numbers, the success of a deal depends heavily on the quality of the relationship, strategic alignment and mutual trust. Many transactions fail not for financial reasons but because of the relationship. This is especially true if the owner-manager stays with the business after the sale.
Letter of intent vs definitive agreement (SPA)
The LOI
- sets out the principles,
- remains general,
- is not exhaustive.
The definitive agreement (SPA)
- legally binding,
- highly detailed,
- finalises the transaction.
The LOI creates a preferential relationship with a view to reaching the SPA (share purchase agreement).
Conclusion: what is a letter of intent really for?
The letter of intent is a strategic tool that makes it possible 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 counterparty and validating the fundamentals at the LOI stage is essential to improve the chances of success.
Before signing an LOI: the questions to check
The letter of intent is often signed in the enthusiasm of a negotiation that is moving forward. Yet this is the moment when each party still holds its maximum bargaining power. A few checks avoid discovering during the exclusivity period that the agreement rested on a misunderstanding.
- Is the price defined without ambiguity? An enterprise value only becomes a price for the shares after deducting net debt and taking the working capital requirement into account. Define these notions in the LOI, drawing on the business valuation methods.
- Is the deferred payment framed? If part of the price is paid later, state its principle: an earn-out linked to performance or a vendor loan repaid according to a schedule.
- Is the buyer's financing credible? The seller can ask which sources are being considered and how far the discussions with lenders have progressed.
- Is the timetable realistic? An exclusivity period too short to carry out the due diligence and secure the financing almost always leads to an extension negotiated under pressure.
Letter of intent: frequently asked questions
What is a letter of intent (LOI) in M&A?
It is a document signed by a buyer and a seller that expresses serious interest, sets out the main terms of the proposed deal and organises the next stage of negotiations (due diligence, exclusivity, timetable). It is generally not a firm commitment to complete the deal.
Is a letter of intent legally binding?
As a rule, not as regards completing the sale, but some clauses are binding (exclusivity, confidentiality, non-solicitation) and some LOIs provide for break fees. The definitive agreement (SPA), by contrast, is fully binding.
What is the difference between an LOI and an SPA?
The LOI sets out the principles and remains general; the SPA (share purchase agreement, the definitive agreement) is legally binding, highly detailed and finalises the transaction.
Why do so many letters of intent fail to lead to a deal?
More than half do not result in a deal: changes in performance during due diligence, disagreements on key terms, buyer financing problems or a breakdown in the personal relationship.
Sources and references
- Code civil, art. 1112 to 1112-2 — pre-contractual negotiations — Légifrance
- Code civil, art. 1112-2 — confidentiality of information obtained during negotiations — Légifrance
- Taking control of a company by buying its shares — Bpifrance Création
Content written and reviewed by the Collaboration Capital team. These references are provided for information only and do not replace legal or tax advice tailored to your situation.
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