Letter of Intent (LOI) in the M&A Process: Contents, Structure & Negotiation Tips

The Letter of Intent (LOI), also called a declaration of intent, is one of the central documents in the M&A process. It sets out the key points of a planned company acquisition before buyer and seller move into detailed due diligence and the negotiation of the purchase agreement. This guide explains what an LOI contains, which clauses are binding and what you should watch out for as a buyer or seller.

What is a Letter of Intent?

A Letter of Intent (LOI) is a written declaration of intent in which a potential buyer records a serious interest in acquiring a company or shares in a company. In German-speaking countries, the terms Absichtserklärung, Grundsatzvereinbarung or Vorvertrag are also used, although the latter (a preliminary contract) has a different legal quality.

The LOI serves several important functions in the M&A process. It creates commitment and trust between the parties, documents the state of negotiations, forms the basis for the subsequent due diligence and makes sure that both sides share an understanding of the key transaction parameters.

In the context of a company sale, the LOI signals that the buyer, after an initial review, is ready to move into the next phase of the process. For the seller, signing an LOI usually means granting the buyer access to confidential company data and, often, negotiating exclusively with that buyer for a defined period.

LOI vs. Heads of Terms vs. Term Sheet

In M&A practice, the terms Letter of Intent, Heads of Terms (HoT) and term sheet are often used interchangeably. They do differ in form and origin, though:

• Letter of Intent (LOI): A formal letter or document declaring the intention to acquire a company. Typical in the DACH region and the US. Besides the commercial key points, it often also contains process rules such as exclusivity and confidentiality.
• Heads of Terms (HoT): A British legal term that matches the LOI in substance. Often drafted as a bullet-point summary of the negotiation results.
• Term sheet: Originally from the venture capital and private equity world. Usually shorter and more focused on the financial and structural terms.

Whatever the term, the function is the same: a pre-contractual document that records the key points of a planned transaction and serves as the basis for further negotiations.

Contents of an LOI: the key components

A professional LOI in an M&A context should contain the following elements. The more detailed and precise the LOI, the less room for negotiation remains in the later purchase agreement. That can be an advantage or a disadvantage.

Object of purchase and transaction structure

The LOI should state clearly whether the transaction is a share deal or asset deal. In a share deal, shares in the company are transferred; in an asset deal, individual assets. The choice of transaction structure has far-reaching tax and legal consequences and should be settled early.

Indicative purchase price range

The LOI typically contains an indicative purchase price range or a specific purchase price based on the information available so far. The price is often stated as enterprise value (EV) and can be based on EBITDA multiples or other valuation methods. The wording “subject to due diligence” is standard.

Price mechanism

The LOI should specify whether the purchase price is determined through a locked box mechanism or through completion accounts. With the locked box approach, the purchase price is fixed on the basis of accounts at a reference date. With completion accounts, the final price is only adjusted after closing, based on closing accounts. Both mechanisms have advantages and disadvantages in terms of price certainty and complexity.

Proof of financing

Especially with private equity buyers or debt-financed transactions, the LOI should refer to the financing structure. A proof of funds or a bank’s financing commitment letter considerably increases the credibility of the offer and gives the seller comfort that the transaction will not fail on financing.

Due diligence scope and timetable

The LOI typically defines the scope of the planned due diligence (financial, tax, legal, operational, commercial) and the intended timeframe. A realistic timetable for the DD is four to eight weeks, depending on the complexity of the target company.

Exclusivity agreement

The exclusivity clause (also no-shop clause) obliges the seller not to hold talks with other potential buyers for a defined period. Usual periods are between four and twelve weeks. From the seller’s point of view, exclusivity should be limited in time and tied to milestones, so the process is not blocked unnecessarily.

Confidentiality clause

Even if a separate non-disclosure agreement (NDA) is often already in place, the confidentiality obligation is restated or extended in the LOI. This matters in particular when sensitive data such as customer contracts, payroll lists or strategic plans are disclosed during due diligence.

Conditions and reservations

Typical reservations (conditions precedent) in an LOI include:

• Satisfactory due diligence
• Securing the financing
• Approval by the governing bodies (advisory board, supervisory board, shareholders’ meeting)
• Merger control clearance (where the relevant turnover thresholds apply)
• No material adverse change (MAC)
• Retention of key persons (key person clause)

Cost allocation

The LOI should state that each party bears its own transaction costs (legal, advisory and audit fees). In some cases, a break-up fee is also agreed: a compensation payable on an unjustified withdrawal.

Timetable

A realistic timetable from LOI to signing typically spans eight to sixteen weeks. The LOI should define milestones: start of due diligence, delivery of the draft purchase agreement, negotiation period and planned signing date. A long stop date adds pressure and clarity for both sides.

Binding vs. non-binding clauses

An LOI is not an “all or nothing” document. In practice, it contains both binding and non-binding parts. Separating the two cleanly is essential to avoid legal disputes.

Typically non-binding clauses

• Purchase price and price mechanism
• Transaction structure (share deal / asset deal)
• Representations and warranties in the purchase agreement
• Transition period and operational arrangements
• Management participation and earn-out arrangements

Typically binding clauses

• Confidentiality obligation
• Exclusivity agreement
• Cost allocation
• Governing law and place of jurisdiction
• Term and termination provisions of the LOI

In practice, it is advisable to add an express clarification clause at the end of the LOI that states which sections are binding and which are non-binding. This reduces the risk that a court classifies the entire LOI as either binding or non-binding.

The LOI in the M&A process

The Letter of Intent marks an important milestone in a company sale. In a typical structured sale process (dual track or auction), the LOI fits in as follows:

• Phase 1, preparation: Preparing the teaser and information memorandum (IM) and approaching buyers through the deal origination process.
• Phase 2, indicative offers: Interested buyers submit a first non-binding offer (indicative offer) based on the IM.
• Phase 3, LOI / shortlisting: The seller selects the most promising buyers. They get access to a data room and draft the LOI with more concrete terms.
• Phase 4, due diligence: Once the LOI is signed, detailed due diligence follows. The buyer examines the company from a financial, legal, tax and operational perspective.
• Phase 5, purchase agreement and signing: Based on the DD results, the purchase agreement (SPA) is negotiated, finalised and signed.
• Phase 6, closing: Once all conditions precedent (merger clearance, board approval) are met, economic ownership passes to the buyer.

LOI negotiation: tips for sellers

For sellers, the LOI is a decisive moment: it sets the frame for the entire further negotiation. As a seller, you should keep the following points in mind:

• Keep competition alive: Try to negotiate with several buyers in parallel for as long as possible before granting exclusivity. A competitive process demonstrably leads to higher purchase prices.
• Limit exclusivity: Agree a short exclusivity period (four to six weeks) with clear milestones. Add an automatic extension clause or a fallback provision.
• Clarify the price basis: Make sure it is clearly defined whether the stated purchase price is an enterprise value or an equity value, and which EBITDA it is based on.
• Minimise conditions: The fewer reservations the buyer has, the more secure the transaction. Check whether all stated conditions are realistic and necessary.
• Cover process costs: Consider a break-up fee, especially if you bear significant costs for advisers and vendor due diligence.
• Prepare adjusted EBITDA: Document normalisations and EBITDA adjustments transparently, to keep discussions about the valuation basis in the LOI to a minimum.

LOI negotiation: tips for buyers

As a buyer, whether a strategic investor or a private equity fund, you should follow these best practices:

• Secure exclusivity: Ask for a sufficiently long exclusivity period (eight to twelve weeks), so you can carry out due diligence thoroughly without coming under time pressure.
• Price range instead of a fixed price: Use a range in the LOI to keep room for negotiation after due diligence. Tie the price to specific KPIs or to the confirmation of assumptions.
• Define the DD scope clearly: List the planned due diligence workstreams and secure full access to the data room and the management team.
• Include a MAC clause: A material adverse change clause protects you against significant negative changes in the target company between LOI and closing.
• Settle financing early: Attach proof of financing to the LOI to show you are serious and to stand out from other bidders.
• Pre-structure warranties and liability: Outline your main warranty expectations in the LOI already, to avoid surprises later.

Common mistakes with an LOI

The following mistakes come up regularly in practice and can put the entire transaction process at risk:

• Unclear binding effect: If it is not clearly marked which clauses are binding and which are not, legal uncertainty and potential liability risks arise.
• Too detailed or too vague: An LOI that is too detailed anticipates negotiation results and can slow the process down. An LOI that is too vague does not provide a sufficient basis and leads to renegotiation.
• Unrealistic timetables: Overly ambitious milestones put both parties under unnecessary pressure and lead to rushed due diligence.
• Missing price basis: Without a clear definition of whether the purchase price is based on enterprise value or equity value, and which EBITDA underlies it, misunderstandings are inevitable.
• Exclusivity that runs too long: An open-ended or overly long exclusivity period ties the seller down unnecessarily and removes competitive pressure.
• Neglecting cost allocation: Without a cost clause, a dispute over who bears the transaction costs can arise if negotiations break down.
• No professional advice: An LOI without an M&A-experienced lawyer carries significant risks, especially when drafting binding clauses.

LOI template: sample structure

The following table shows the typical structure of an LOI in a DACH M&A context. The specific drafting varies by transaction size, sector and negotiating situation.

Note: this template is for orientation only and does not replace individual legal advice. The specific drafting of a LOI should always involve a lawyer specialising in M&A.