Letter of Intent (LOI) in Corporate Acquisitions: Where the Deal is Won or Loston

The Letter of Intent (LOI) is not a mere formality, but a legal document that must be taken extremely seriously. In current deal practice, the LOI records the material terms of the (sale and purchase) transaction, and it is this document that determines who has control in the further acquisition process. Those who underestimate this lose substantial negotiating position before the next phases of the (sale and purchase) process even begin.

A key point of focus in the LOI is the purchase price. The seller often considers himself well off based on the purchase price stated in the LOI, but the purchase price in the LOI is almost never the amount received by the seller at the notarial transfer of shares. This often leads to disappointment for sellers who have not been properly advised during the LOI negotiations.

This blog is the first part of a four-part series on corporate acquisitions/(sale and purchase) transactions. In this series, we discuss the dealmakers and dealbreakers at various stages of the acquisition process that make the difference between a successful and unsuccessful deal.

In this first part, the Letter of Intent (LOI) takes centre stage. It is precisely in this phase that it is decided how much control the seller retains over the price, risks, and subsequent negotiations. In the following parts of this blog series, we will address other crucial components of the acquisition process.

The binding nature of an LOI
In the LOI, the structure of the transaction is established, the purchase price principles, timing, the scope of due diligence, and other important deal terms. More importantly, the LOI records how risks are allocated between buyer and seller, and where there is still room to manoeuvre.

Increasingly, LOIs contain strict legal terms that cannot be renegotiated. Other parts of the LOI may formally leave room for further definition, but in practice this room is often very limited. That requires conscious choices and expert guidance in shaping the content of the LOI. Paying insufficient attention to this document effectively means accepting the other party’s agenda.

Dealbreakers: where things often go wrong
In practice, we observe that selling owner-directors face the same problems repeatedly. These include:

• The LOI is seen as nothing more than a starting point, underestimating how much is already set in stone at that stage.
• The purchase price is read as a firm guarantee, while in reality there are almost always later adjustments for working capital, debt, warranties or claims. Without clear agreements, this is a one-way street.
• Legal counsel is involved too late; by the time the sale and purchase agreement is drawn up, negotiation space has diminished since essential deal terms are already fixed in the signed LOI.
• There are no clear break-up provisions. If the transaction process falls through (for example, after thorough due diligence) after months of work, disputes arise about costs, liability, and obligations.
• Each additional step increases exposure. The further the parties proceed, the less room there is to change course without making concessions.

Dealmaker: how to retain control
A strong LOI protects the position and keeps the process manageable:

• Suspensive conditions, including the outcome of the due diligence process and obtaining financing on acceptable and market-compliant terms, must be clearly stipulated.
• The seller’s liability should not be deferred to the sale and purchase agreement, but ideally be limited in the LOI. Waiting here leads to a weak negotiating position.
• Earn-out arrangements require concrete and enforceable agreements. Ambiguity almost always leads to prolonged and costly conflicts, ending only in court.
• Security should be provided with a vendor loan. Without security, it is uncertain if and when the loan will be repaid.

Every sales deal includes a non-competition and non-solicitation covenant. If the LOI merely states that a “customary clause” will be included in the SPA, this leads to substantial negotiation later about its precise content.

Legal control starts with the LOI
The LOI stage is when the seller must shape control. Not afterward. Leaving this to a later stage means having to repair under pressure, at higher cost and with fewer options. This is not a document to “just sign off”. It is the foundation of the deal.

On March 26, we will explain this further during the National Acquisition Day of Brookz. At this event, we will address the legal aspects involved in the acquisition and sale of businesses, sharing our practical experience—gained in numerous acquisition processes—along with smart tips & tricks that save considerable headaches.

At the National Acquisition Day of Brookz, other professional parties will also be present to assist entrepreneurs.