A letter of intent sums up the key points of a planned takeover: approximate price, planned process, timeframe and the conditions for the next steps. It is usually signed after the first talks and before the due diligence.
As far as the purchase itself goes, a LOI is generally non-binding. Individual points very much are, though: confidentiality, for instance, or an exclusivity that grants the buyer sole negotiation rights for a certain period.
The LOI creates clarity and commitment without both sides having to commit for good just yet. This is where non-binding interest turns into a serious intention, visible and comprehensible to both.
Typical contents are the rough purchase price or a price range, the planned structure of the takeover, the timetable, exclusivity, confidentiality and the reservation of a successful review. Part of that, such as the price, is often already the result of an initial price negotiation.
For small successions, a LOI does not have to be complicated. Even a short, clear letter of intent creates a common basis before both sides invest time and money in the review. The later purchase agreement builds directly on it.
For business sellers
For you as the seller, the LOI creates commitment without a final decision. You can tell whether the buyer is serious before granting them deep insights into your company and opening your data room.
Above all, check the exclusivity. If you tie yourself to a single interested party, you cannot negotiate with others during that time. Keep the period short enough that you stay able to act, should it not work out after all.
For corporate buyers
For you as the buyer, the LOI is the basis for entering the demanding review with a clear conscience. It assures you that the seller will not sell to others in parallel during that time.
State clearly which points are non-binding and which are not. A cleanly drafted LOI prevents misunderstandings and makes clear under which conditions the intention becomes a purchase agreement.
Example
After two good talks, buyer and seller sign a LOI: intended purchase price around 750,000 euros, subject to due diligence. Four weeks of exclusivity and strict confidentiality are agreed. Only then does the seller open his books.
FAQ
Is a letter of intent binding?
As far as the purchase itself goes, generally not. Individual points such as confidentiality or exclusivity are usually binding, though. What applies and what does not should be clearly stated in the LOI.
What belongs in a letter of intent?
The rough purchase price or a price range, the planned process, the timeframe, exclusivity, confidentiality and the reservation of a successful due diligence.
What is the difference between a LOI and a purchase agreement?
The LOI records the intention and the key points, usually non-binding. The purchase agreement is the final, legally binding agreement and is only signed after the review.
Why should I as a seller pay attention to exclusivity?
Because you tie yourself to a single interested party for the agreed period and cannot negotiate with others. Keep the period short enough to stay able to act, should it not work out after all.
Do I even need a LOI for a small succession?
It is not mandatory, but very helpful. Even a short letter of intent creates clarity about the price range, process and confidentiality before both sides go into the demanding review.
Who draws up the letter of intent?
Usually the buyer's side brings in a draft, often with the support of an advisor or lawyer. Both sides agree on the key points. What matters is that in the end both understand exactly what is binding and what is not.
Back to glossary
