The LOI establishes the key deal parameters: indicative enterprise value and equity value, proposed deal structure (share deal vs asset deal), exclusivity period (typically 60–90 days), conditions precedent (financing, regulatory approvals), non-binding representations on adjustments (working capital peg, net debt definition), and the governing law for the subsequent SPA. While the price is usually described as 'subject to confirmatory due diligence', buyers use this language to re-trade post-LOI if they find issues.
The exclusivity clause is the most consequential provision from a seller's perspective. Once signed, the seller cannot negotiate with other buyers for the exclusivity period. If diligence reveals no issues but the buyer simply re-trades on price ('gazundering'), the seller must choose between accepting the lower price or terminating and restarting the process — typically a 3–6 month delay and loss of other interested parties. Sellers should negotiate short exclusivity periods (45–60 days) and clear conditions for extension.
Key terms to negotiate in the LOI before signing: (1) Define the working capital peg methodology — not just the concept; (2) Define which items constitute net debt — including treatment of leases, CCA, and pension obligations; (3) Set the earnout structure in enough detail that re-trading becomes difficult; (4) Agree on whether management representation warranties will be limited to gross negligence or cover all representations in the SPA; (5) Confirm scope of due diligence access and timeline.
LOI term negotiation
Buyer LOI offers €18m EV, 75-day exclusivity, NWC peg 'to be agreed', net debt 'as defined in the SPA'. Red flags: an unspecified NWC peg allows the buyer to argue for a lower peg in diligence (creating a closing adjustment); an undefined net debt lets them add IFRS 16 leases (€400k) after LOI. VBP negotiates: peg = trailing 12-month average per agreed methodology, net debt excludes IFRS 16 short-term leases, exclusivity 45 days.
Frequently asked questions
Is an LOI legally binding?
The commercial terms (price, structure) are expressly non-binding in most LOIs. However, specific clauses are binding: the exclusivity obligation, the confidentiality undertaking, break fee provisions (if any), and governing law. Courts in France and Switzerland have held sellers to exclusivity obligations even when the LOI price was clearly labelled as indicative.
What is the difference between an LOI and a term sheet?
Functionally similar: both set out commercial terms in outline before the SPA. In Anglo-Saxon practice, 'term sheet' is preferred; in France, 'lettre d'intention' or 'protocole d'accord'; in Switzerland, 'letter of intent' or 'term sheet'. A Memorandum of Understanding (MOU) serves the same purpose. The key distinction is not the label but the specific clauses that are expressed as binding vs non-binding.
When should a seller sign an LOI?
Only after: (1) verifying the buyer has credible financing (PE buyer with fund capacity, strategic with board approval, or individual buyer with proof of funds); (2) negotiating the key terms (not just accepting the buyer's first draft); (3) having the LOI reviewed by an M&A advisor and legal counsel. Signing a poorly negotiated LOI is the single most common mistake in SME M&A — it creates leverage for buyer re-trading throughout diligence.