The Letter of Intent is not a formality, but a legal document that greatly influences the further course of a business acquisition. In current deal practice, the LOI already lays down the essential agreements about the (sales) purchase.
It also determines who is in charge in the follow-up process. Those who take this document too lightly often lose negotiating power before the next stages have even begun.
An important consideration in the LOI is the purchase price. Sellers often already calculate themselves rich on the basis of the stated price, while the purchase price in the LOI is almost never the amount ultimately received at the notarial share transfer. Adjustments via working capital, debt, guarantees or claims are the rule rather than the exception.
This frequently leads to disappointment for sellers who have not been adequately advised during LOI negotiations.
The binding nature of an LOI
In the LOI, you lay out the structure of the transaction, the assumptions for the purchase price, the schedule, the scope of due diligence and other important dealterms. Equally important, you record how risks will be allocated and where parties still have room to move.
Increasingly, an LOI contains hard legal agreements that cannot be reversed. Other parts formally leave room for further elaboration, but that room often turns out to be limited in practice. This requires conscious choices and expert guidance when drawing up the LOI. Those who pay insufficient attention to this actually accept the other party's agenda.
Dealbreakers: this is where things often go wrong
In practice, selling DGAs run into the same pitfalls all the time:
- The LOI is seen as a non-committal starting point, while at that point much is already established.
- The purchase price is read as security, while corrections almost always follow. Without proper agreements, this often works to the seller's disadvantage.
- Legal guidance comes into the picture too late. By the time the purchase agreement is drafted, the room for negotiation is often already largely gone.
- Clear agreements about breaking off the deal are lacking. Strand the trajectory after months of work, then discussions arise about costs, liability and obligations.
- Each subsequent step increases exposure. The further the process progresses, the more difficult adjusting becomes without concessions.
Dealmaker: this is how to maintain direction
A strong LOI protects the seller's position and keeps the process manageable:
- Suspensive conditions, such as due diligence and financing on market terms, must be clearly established.
- Liability of the seller is ideally already capped in the LOI. Those who push this through weaken their negotiating position.
- Earn-out arrangements require concrete and enforceable agreements. Lack of clarity often leads to lengthy and costly conflicts.
- With a vendor loan comes collateral. Without collateral, repayment is uncertain.
- Non-competition and relationship clauses must be sufficiently concrete. A reference to a "customary clause" almost always leads to discussion.
Legal direction begins at the LOI
The LOI is the time when the seller must co-determine the direction. Not later. Those who fail to do so must repair under pressure, with higher costs and fewer options. This is not a document to "just sign. This is the foundation of the deal.
