Letter of Intent

The Letter of Intent, abbreviated as LOI, marks a significant milestone in the transaction process of a company. It is a term sheet that outlines the intent to close a transaction as well as all previously agreed negotiation results. It is also referred to as a Memorandum of Understanding. Although this document does not render all details legally binding yet, and some items need to be verified through due diligence, a signed letter of intent generally leads to a successful transaction.

What is agreed upon in an LOI?

In the sale process, a Letter of Intent comes after the first negotiation round with the candidate selected from the received offers. It does not yet constitute a legally binding pre-contract as not all aspects documented in it are legally binding. The transaction-related sections of the letter of intent in particular are not yet legally enforceable but serve as the foundation for all subsequent negotiations and the due diligence. However, the serious intent to close the transaction, as well as the obligations of confidentiality and exclusivity among the negotiation partners, are legally binding.

Items recorded in an LOI include:

• Purchase price
• Payment terms and conditions
• Guarantees
• Non-compete clause
• Timeline and prerequisites with regard to the due diligence process
• Arrangements regarding management
• Termination conditions
• Confidentiality and handling of information

Each transaction is unique, so each letter of intent should be individually drafted with the support of M&A and legal experts. For instance, if an external candidate is to acquire the shares, specific details such as retaining the company name and location or the seller’s support during the transition period can be stipulated.

The letter of intent typically concludes the preliminary negotiations and documents the achieved results to serve as the basis for the subsequent due diligence. During this process, the aspects of the Letter of Intent are reviewed for completeness and accuracy. If there are no significant deviations, the preliminary or final purchase agreement can be drafted.

Soft or hard LOI?

A soft Letter of Intent is limited to stating that the parties are in negotiations for a contract. Although it contains some details, it must be signed in good faith; otherwise, claims for damages may be asserted.

In contrast, a hard Letter of Intent does contain legally binding elements and documents specific contractual details. Although a hard Letter of Intent is not a pre-contract, both parties assume obligations related to the transaction.