Letter of Intent in Acquisitions: Win or Lose the deal

A Letter of Intent (LOI) is a foundational legal document in any company acquisition or sale. It is not merely a formality. Instead, it sets out the key terms and conditions of the deal. As a result, it significantly influences negotiations for both sellers and buyers. The party with better control over the Letter of Intent generally holds a strategic advantage. Therefore, it is essential to approach this document with utmost seriousness.

Why the Letter of Intent Matters for Purchase Price

A major focus within any Letter of Intent is the purchase price. Sellers are frequently reassured by the amount stated. However, the purchase price in the Letter of Intent is rarely the final amount paid at the notarial transfer of shares. Without experienced legal advice at this stage, sellers often find themselves disappointed. This highlights the importance of detailed negotiation and legal review from the start.

What This Blog Series Covers

This article launches a four-part blog series on company acquisition and sale processes. The series will explore essential dealmakers and dealbreakers at each stage. It offers practical insights to help parties achieve successful outcomes.

In this first installment, the focus is exclusively on the Letter of Intent. This initial phase is critical. Decisions made here will affect the seller’s control over the purchase price. They also determine allocation of risks and leverage in subsequent negotiations. The next articles will cover other pivotal aspects of the acquisition process.

Key Elements Defined in the Letter of Intent

In the Letter of Intent, the structure of the transaction is established. This includes purchase price principles, timing, and the scope of due diligence. More importantly, the Letter of Intent records how risks are allocated between buyer and seller. It also shows where there is still room to manoeuvre.

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

Dealbreakers: Where Things Often Go Wrong

Many business owners make the same mistakes during the sale of their company. Knowing these ahead of time helps sellers avoid trouble and get a better deal.

First, some owners believe the Letter of Intent is only a first step. In fact, a lot is already decided, and it can be hard to change later. Second, the price in the Letter of Intent often looks like a promise. However, it usually changes later due to adjustments for working capital, debts, and issues found during due diligence. If these agreements are unclear, the seller may lose out.

Third, legal support often comes when the sale agreement is being made. By then, key details are already set in the signed Letter of Intent. This leaves less room to negotiate better terms. Fourth, sellers sometimes forget to agree on what happens if the sale process stops. Without clear rules, there can be arguments about costs and responsibilities. Finally, the further along you go in the selling process, the less freedom there is to turn back without losing out.

Dealmakers: How to Retain Control

A strong Letter of Intent protects the seller’s position and keeps the process manageable. Suspensive conditions must be clearly stipulated. These include the outcome of due diligence and obtaining financing on acceptable terms.

Furthermore, the seller’s liability should not be deferred to the sale and purchase agreement. Ideally, it should be limited in the Letter of Intent. Waiting leads to a weak negotiating position. Additionally, earn-out arrangements require concrete and enforceable agreements. Ambiguity almost always leads to prolonged and costly conflicts that end only in court.

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

Legal Control Starts with the Letter of Intent

The Letter of Intent stage is when the seller must shape control—not afterward. Leaving this to a later stage means having to repair under pressure. It comes 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, this topic will be explained further during the National Acquisition Day of Brookz. At this event, the legal aspects involved in the acquisition and sale of businesses will be addressed. Practical experience from numerous acquisition processes will be shared, along with smart tips and tricks that save considerable headaches. Other professional parties will also be present to assist entrepreneurs.