{"id":5102,"date":"2024-10-14T10:38:29","date_gmt":"2024-10-14T08:38:29","guid":{"rendered":"https:\/\/maraz.es\/?p=5102"},"modified":"2026-10-12T18:52:41","modified_gmt":"2026-10-12T16:52:41","slug":"letter-of-intent-loi-in-ma-practical-guide","status":"publish","type":"post","link":"https:\/\/maraz.es\/en\/letter-of-intent-loi-in-ma-practical-guide\/","title":{"rendered":"Letter of Intent (LOI) in M&A transactions: a practical guide"},"content":{"rendered":"

The letter of intent \u2013 LOI is a formal, preliminary agreement to the sale and purchase agreement (SPA<\/a>), setting out the terms and conditions of a company sale (M&A) transaction. It sets the main aspects of the deal and is a very useful tool for showing whether the parties share views and common interests about the transaction. <\/strong><\/p>\n

Within the stages of the business sale process<\/a>, the LOI sits at the step before due diligence and the definitive agreement.<\/strong><\/p>\n

A frequent mistake is to treat it as a mere bureaucratic formality. In practice, it is a first-rate strategic tool, since the terms accepted in the LOI \u2014 price, structure, exclusivity, adjustment mechanism \u2014 are extremely hard to renegotiate once signed,<\/strong> even though the document is formally non-binding in many of its clauses. A seller who signs an LOI without having analysed it in detail rarely manages to improve the terms in the SPA.<\/p>\n

Legal nature of the LOI<\/h2>\n

The letter of intent has no specific regulation in the Spanish Civil Code or Commercial Code. Its validity stems from the principle of freedom of contract enshrined in article 1,255 of the Civil Code.<\/strong> This absence of regulation makes the LOI an atypical contract whose effectiveness depends almost exclusively on the quality of its drafting and on the courts’ interpretation of the parties’ intention.<\/p>\n

There is confusion about whether or not an LOI obliges the parties to close the transaction. The technical answer is that the LOI is a hybrid document: while the economic terms (price, structure) are usually non-binding, certain procedural clauses acquire full contractual force from the moment of signing.<\/strong><\/p>\n

Supreme Court case law has established that if an LOI contains all the essential elements of a contract \u2014 consent, subject matter and cause \u2014 and does not include a clear reservation or non-binding clause, it could be characterised as a binding pre-contract requiring specific performance of the sale. That is why it is vital for the document to include an explicit clause delimiting which sections are mere statements of intent and which are firm legal obligations.<\/p>\n

Culpa in contrahendo: breaking off negotiations and liability<\/h3>\n

Even in the non-binding sections, the parties are not free to act arbitrarily. Spanish law imposes a duty to act in good faith in preliminary dealings. The unjustified breaking off of negotiations when they are at an advanced stage and have created a legitimate expectation of closing in the other party can give rise to liability for culpa in contrahendo<\/strong>.<\/p>\n

This liability usually results in an obligation to compensate the negative contractual interest<\/strong>: the expenses the injured party incurred in reliance on the completion of the deal \u2014 lawyers’ fees, audit costs, due diligence, travel. It generally does not include lost profits or the gains that would have been obtained had the transaction closed. It is a relevant distinction: withdrawing from an advanced negotiation is not free, even if the LOI is formally non-binding.<\/p>\n

Where the LOI fits in the M&A process<\/h2>\n

To understand the role of the LOI it is worth placing it in the full flow of a transaction. The process of selling a company usually follows this sequence:<\/p>\n

Preparation \u2192 Marketing \u2192 Indicative offers (NBO) \u2192 Selection of candidates \u2192 Due Diligence \u2192 Letter of Intent (LOI) \u2192 Negotiation of the SPA \u2192 Closing<\/strong><\/p>\n

In medium or large transactions the following scheme is common: first Non-Binding Offers (NBOs) are received, one or two finalists are selected, they are given access to the Virtual Data Room for deeper due diligence, and after that process the LOI is negotiated and signed as the step before the SPA. In smaller transactions, the LOI is signed before due diligence, on a non-binding basis, so as not to incur due diligence costs before verifying that there is a basic agreement on price and structure.<\/p>\n

Binding and non-binding clauses:<\/h2>\n

One of the defining features of the LOI is the coexistence of binding<\/strong> clauses \u2014 mandatory from signing \u2014 and non-binding<\/strong> clauses \u2014 which reflect the parties’ intention but do not generate immediate legal obligations.<\/p>\n

Non-binding clauses on price or structure allow the negotiation to continue in the light of the due diligence findings.<\/strong><\/p>\n

But binding clauses \u2014 especially exclusivity and confidentiality \u2014 create real obligations from the very first moment and can give rise to liability if breached.<\/strong><\/p>\n

The document must be explicit about what is binding and what is not<\/strong>. An LOI that is ambiguous on this point creates legal uncertainty and can be used by either party to maintain contradictory positions during the negotiation.<\/p>\n

The essential components of an LOI<\/h2>\n

Structure and perimeter of the transaction<\/h3>\n

It defines the legal nature of the transaction<\/strong>: sale of shares (share deal<\/em>), sale of assets (asset deal<\/em>), merger, demerger or a combination of the above. This decision is not neutral: it has direct implications for the tax treatment, for the perimeter of liabilities the acquirer takes on and for the complexity of the closing process.<\/p>\n

In a share deal<\/em><\/strong>, the buyer acquires the company with all its assets, liabilities and contingencies \u2014 known and unknown.<\/p>\n

In an asset deal<\/em>,<\/strong> it selects which assets and liabilities it takes on, which offers greater protection against historical contingencies but can generate friction with customers, suppliers and employees whose consent is required for the transfer.<\/p>\n

The LOI must also precisely identify the perimeter of the transaction<\/strong>: which subsidiaries, property assets, intellectual property or productive units are included. Ambiguity about the perimeter is one of the main causes of failure in M&A transactions, especially in groups with fragmented shareholdings or assets in several jurisdictions.<\/p>\n

Purchase price and the Equity Bridge<\/h3>\n

This is the heart of the LOI. It is not enough to state a figure: the basis on which it is calculated must be specified<\/strong>. In professional practice, the price is expressed as an Enterprise Value (EV)<\/strong> calculated on a cash-free, debt-free<\/em> basis and assuming a normalised level of working capital. The LOI must provide for the Equity Bridge<\/strong>: the formula that converts the value of the business into the value of the shares to be transferred at closing:<\/p>\n

Equity Value = Enterprise Value + Cash \u2212 Financial Debt \u00b1 Working Capital Adjustment<\/strong><\/p>\n

It includes the proposed amount, the method of payment and the timetable, detailing how much will be paid at closing and how much will depend on future conditions \u2014 for example, through an earn-out<\/a> linked to results.<\/strong><\/p>\n

It is essential for the LOI to define which items will be treated as cash (cash-like items<\/em>) and which as debt (debt-like items<\/em>).<\/strong> The most frequent debt-like items omitted from badly drafted LOIs include tax contingencies, debts to public authorities, pending severance payments, unexecuted CAPEX commitments, shareholder loans and environmental liabilities. Each of these can mean a significant price adjustment the seller did not anticipate when reading the indicative figure.<\/p>\n

Price adjustment mechanism at closing<\/h3>\n

The LOI must define which of the two predominant mechanisms will apply to determine the final price:<\/strong><\/p>\n\n\n\n\n\n\n
Mechanism<\/th>\nDescription<\/th>\nAdvantage for the seller<\/th>\nAdvantage for the buyer<\/th>\n<\/tr>\n<\/thead>\n
Locked Box<\/strong><\/td>\nFixed price based on a historical balance sheet prior to signing<\/td>\nTotal certainty; avoids post-closing disputes<\/td>\nSimplified closing; no audits on the day of transfer<\/td>\n<\/tr>\n
Completion Accounts<\/strong><\/td>\nPrice adjusted according to an audited balance sheet at the closing date<\/td>\nPossibility of capturing value increases up to the last day<\/td>\nGuarantee of paying for the exact reality of assets and liabilities<\/td>\n<\/tr>\n<\/tbody>\n<\/table>\n

 <\/p>\n

The Locked Box<\/strong> is preferred by private equity funds in their exit processes, as it offers certainty and speed.<\/p>\n

Completion Accounts<\/strong> are more common in industrial companies with greater working capital variability.<\/p>\n

The Net Working Capital adjustment<\/h3>\n

The Working Capital adjustment is possibly the point of greatest friction in the post-LOI phase<\/strong>. The parties must agree a reference level of working capital \u2014 the target<\/em> or peg<\/em> \u2014 usually based on the average of the last 12 months. Any deviation at closing from this level will result in an upward or downward adjustment to the final price.<\/p>\n

The LOI must be explicit about which components are included in the calculation (inventories, trade receivables, payables) and which are excluded as being financial or non-operating in nature. Discrepancies in the definition of Working Capital are a common source of post-closing litigation that is avoided with precise drafting in the LOI.<\/p>\n

Due Diligence<\/h3>\n

The LOI must define the <\/strong>scope of the buyer’s information review (due diligence)<\/strong><\/a>, the access provided by the seller and the warning of possible adjustments for identified contingencies. It is worth having the financial due diligence checklist<\/strong><\/a> clear in advance.<\/p>\n

It usually includes financial, legal, tax, employment, technical, environmental and commercial DD. It must also establish the timeframe for carrying it out, the format of access to information (Virtual Data Room, meetings with management, site visits) and the consequences of material findings on the price and closing conditions.<\/p>\n

The seller must understand that, once the LOI is signed and due diligence opened, any significant negative finding \u2014 hidden debt, undisclosed litigation, regulatory problems \u2014 will give the buyer arguments to renegotiate downwards. Limiting the scope and duration of due diligence in the LOI is a form of protection many sellers overlook.<\/p>\n

Indemnification and warranties framework (R&W)<\/h3>\n

It summarises the expectations about the seller’s indemnification obligations towards the buyer, including duration and limitations. These obligations are later developed in the SPA through the representations and warranties (reps & warranties)<\/strong><\/a> regime. Although the SPA is where the representations and warranties regime is negotiated in detail, the LOI should already set the general parameters. The usual standards in the Spanish market are:<\/p>\n