LOI (Letter of Intent): What it is, what it is for, and what it should include

In any M&A transaction, clear communication and a preliminary agreement between buyer and seller are essential for the sale process to proceed smoothly. In this article, we explain what a Letter of Intent or LOI is, what it is used for, and what key elements it should include.

 

What is a LOI?

A Letter of Intent (LOI) is a non-binding document that sets out the preliminary terms and conditions between a buyer and a seller in an M&A transaction.

Its purpose is to guide the negotiations and the due diligence/audit process, serving as the basis for the drafting of the final agreement.

 

What is it for?

The LOI fulfils several essential functions in any company sale process:

• Preliminarily defines the key terms and conditions of a transaction.
• It provides a level of protection for both parties by establishing clear expectations before the final agreement.
• It helps to reduce the risk of misunderstandings during negotiations, facilitating a smoother and more structured process.
• Set specific deadlines for the operation.

 

What should it include?

Una LOI suele contener los siguientes elementos básicos:

• Parties involved: Full legal identification of the buyer and seller, including official names and addresses.
• Summary and structure of the transaction: Description of the business to be acquired and type of transaction, indicating whether it will be a purchase of assets, purchase of 100% of the shares, acquisition in different phases or other options.
• Purchase price: Indication of the proposed price (subject to audit or due diligence) or formula to be used to determine it.
• Method of payment: Details of the fixed and variable components of the payment. In the event of deferred payments being agreed, the type of guarantee shall be specified.
• Confidentiality clause: Commitment by both parties to maintain the confidentiality of the information shared.
• Exclusivity period: The period during which the seller undertakes not to negotiate with other potential buyers.
• Proposed schedule: Estimated timeframes for due diligence, negotiation of the sale agreement, and closing of the transaction.

 

The LOI as the basis for solid negotiations

The LOI is a fundamental tool in any M&A process, as it allows a clear and structured basis to be established from the outset to guide the negotiation. Although it is not binding, its correct drafting and negotiation are essential to avoid misunderstandings or subsequent conflicts, thus facilitating a smoother transition to the final sale agreement.

A well-drafted LOI can make the difference between a successful transaction and a complicated or failed process. Therefore, obtaining the right advice is essential to ensure that the interests of both parties are properly reflected from the outset.