A letter of intent does not commit either side to sell or to buy. It does commit you to things that materially change your position: exclusivity, confidentiality and usually your own costs. It is the point at which a seller gives up the most in exchange for the least binding promise.
What an LOI is
The letter of intent is signed once indicative offers are in, before due diligence starts. It sets out price, deal structure, timetable and the rules for the review. Most of it is non-binding, but a few clauses do bind, and those clauses shape the next six months.
What actually binds
- Exclusivity. You undertake not to talk to other buyers for a set period, usually sixty to ninety days. This is the single most important clause in the document.
- Confidentiality. Usually a restatement of the earlier NDA, sometimes extended with a non-solicitation of employees.
- Costs. Each side bears its own. Check there is no clause requiring you to cover the buyer’s costs if you withdraw.
- Break fee. Rare in SME deals, but if one is there, read carefully which way it points.
What does not bind
The price. This is the most common misunderstanding. The price in an LOI is a statement based on information available before the review. After due diligence the buyer can change it, and usually does. The mechanism is called price chipping and it is a normal part of the process, not a sign of bad faith.
Nor does the transaction itself. Either side can walk away and normally carries no liability for doing so.
How to negotiate an LOI
Shorten the exclusivity. Sixty days is enough for a standard review of an SME. Ninety is the buyer’s comfort, not yours.
Write in how it can be extended. Exclusivity should lapse automatically rather than roll over in silence.
Define the scope of the review. The more precisely you set out what due diligence covers and by when, the less room there is for the process to drift.
Agree what happens if the price moves. You can provide that a reduction beyond a stated threshold releases you from exclusivity.
Before you sign
Make sure you know what the buyer will find. Exclusivity means two to three months with no alternative, and every surprise in due diligence will cost you price. The twelve areas worth going through in advance are in the red flags checklist.
See also
- LOI, exclusivity and term sheet in the glossary
- How long it takes to sell a company, to see where the LOI falls in the timetable
- Frequently asked questions about the sale process
About the author
Łukasz Brzyski runs Brzyski & Partners Management Consulting. He advises on the sale and purchase of companies valued between PLN 10 and 50 million, and sold two companies he co-founded before he started advising others. More about the author