{"id":5102,"date":"2024-10-14T10:38:29","date_gmt":"2024-10-14T08:38:29","guid":{"rendered":"https:\/\/maraz.es\/?p=5102"},"modified":"2026-07-16T17:59:58","modified_gmt":"2026-07-16T15:59:58","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 \u2014 LOI \u2014 is one of the most important documents in a company sale process. It is the first moment at which buyer and seller commit in writing that they wish to pursue a transaction and on what general terms. What is negotiated in the LOI will shape everything that follows.<\/strong><\/p>\n

A common mistake is to treat it as a mere administrative formality. In practice, it is a first-order strategic instrument: the terms accepted in the LOI \u2014 price, structure, exclusivity, adjustment mechanism \u2014 are extremely difficult to renegotiate once signed, even when the document is formally non-binding in many of its provisions.<\/strong> A seller who signs a LOI without having analysed it carefully rarely manages to improve the terms in the SPA.<\/p>\n

Legal nature of the Letter of Intent (LOI)<\/h2>\n

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

There is persistent confusion as to whether a LOI legally obliges the parties to close the transaction. The technical answer is that the LOI is a hybrid document: while economic terms (price, structure) are typically non-binding, certain procedural provisions acquire full contractual force from the moment of signing.<\/strong><\/p>\n

The Spanish Supreme Court has established that if a LOI contains all the essential elements of a contract \u2014 consent, subject matter and consideration \u2014 and does not include a clear non-binding reservation clause, it could be characterised as a binding pre-contract requiring specific performance of the sale. It is therefore vital that the document includes an explicit clause delimiting which provisions are mere statements of intent and which constitute firm legal obligations.<\/p>\n

Pre-contractual liability: culpa in contrahendo<\/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 during pre-contractual negotiations. The unjustified withdrawal from negotiations when these have reached an advanced stage and have generated a legitimate expectation of closing on the other side may give rise to liability for culpa in contrahendo<\/em>.<\/strong><\/p>\n

This liability typically results in an obligation to compensate the negative contractual interest<\/strong>: the costs incurred by the injured party in reliance on the completion of the deal \u2014 legal fees, audit costs, due diligence expenses, travel. It generally does not extend to loss of profit or the gains that would have been obtained had the transaction closed. The distinction is relevant: withdrawing from advanced negotiations is not cost-free, even when 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 useful to place it within the full transaction timeline. A company sale process typically follows this sequence:<\/p>\n

Preparation \u2192 Marketing \u2192 Indicative offers (NBO) \u2192 Candidate selection \u2192 Due Diligence \u2192 Letter of Intent (LOI) \u2192 SPA negotiation \u2192 Closing<\/strong><\/p>\n

In mid-sized or large transactions, the typical structure is: receipt of Non-Binding Offers (NBOs), selection of one or two finalists, access to a Virtual Data Room for deeper due diligence, and then negotiation and signing of the LOI as the step preceding the SPA. In smaller transactions, the LOI is signed before due diligence on a non-binding basis, to avoid incurring due diligence costs before confirming that there is basic agreement on price and structure.<\/p>\n

Binding and non-binding provisions<\/h2>\n

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

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

Binding provisions \u2014 particularly exclusivity and confidentiality<\/strong> \u2014 create real obligations from the outset and may generate liability if breached.<\/p>\n

The document must be explicit about which provisions are binding and which are not.<\/strong> An ambiguous LOI on this point creates legal uncertainty and may be used by either party to support contradictory positions during negotiation.<\/p>\n

Essential components of a LOI<\/h2>\n

Transaction structure and perimeter<\/h3>\n

Defines the legal nature of the transaction:<\/strong> share purchase (share deal<\/em>), asset purchase (asset deal<\/em>), merger, demerger or a combination thereof. This decision is not neutral: it has direct implications for tax treatment, the scope of liabilities assumed by the acquirer and 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 to take on, offering greater protection against historical contingencies but potentially creating friction with customers, suppliers and employees who must consent to the transfer.<\/p>\n

The LOI must also identify the transaction perimeter<\/strong> with precision: which subsidiaries, real estate assets, intellectual property or business units are included. Ambiguity in perimeter definition is one of the leading causes of M&A transaction failure, particularly in groups with fragmented shareholding or assets across multiple jurisdictions.<\/p>\n

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

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

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

It is essential that the LOI defines which items are treated as cash<\/strong> (cash-like items<\/em>) and which are treated as debt<\/strong> (debt-like items<\/em>). The debt-like items most frequently omitted from poorly drafted LOIs include tax contingencies, amounts owed to public authorities, outstanding indemnity obligations, committed but unexecuted capex, shareholder loans and environmental liabilities. Each of these can result in a material price adjustment that 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\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 pre-signing<\/td>\nFull price 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 against an audited balance sheet at the closing date<\/td>\nAbility to capture value increases up to the last day<\/td>\nGuarantee of paying for the exact asset and liability position at closing<\/td>\n<\/tr>\n<\/tbody>\n<\/table>\n<\/div>\n

The Locked Box<\/strong> is the preferred mechanism for Private Equity funds on exit, offering certainty and speed.<\/p>\n

Completion Accounts<\/strong> is more common in industrial businesses with higher working capital variability.<\/p>\n

Net Working Capital adjustment<\/h3>\n

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

The LOI must be explicit about which components are included in the calculation (inventories, trade receivables, trade payables) and which are excluded as financial or non-operating items. Disagreements over the Working Capital definition are a recurring source of post-closing disputes that precise LOI drafting can prevent.<\/p>\n

Due diligence<\/h3>\n

The LOI must define the scope of due diligence:<\/strong> financial, legal, tax, employment, technical, environmental and commercial. It must also establish the timeframe, the format of information access (Virtual Data Room, management meetings, site visits) and the consequences of material findings on price and closing conditions.<\/p>\n

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

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

Although it is the SPA that sets out the detailed regime of Representations & Warranties, the LOI should already establish the general parameters. Market standards in Spain are:<\/p>\n

    \n
  • Liability cap:<\/strong> Typically between 10% and 50% of transaction value. In 23% of transactions the cap equals the full price.<\/li>\n
  • Claim threshold (basket):<\/strong> The standard is that the seller is only liable for damages exceeding 0.5% of the price. Once that threshold is crossed, in 60% of cases the seller is liable from the first euro.<\/li>\n
  • Claim period:<\/strong> 18 months for general warranties; for tax and employment matters the statutory limitation period is typically agreed (4\u20135 years).<\/li>\n<\/ul>\n

    Agreeing these parameters at LOI stage \u2014 even in outline \u2014 avoids unwelcome surprises when the SPA is well advanced and time pressure has reduced the seller’s room for manoeuvre.<\/p>\n

    Warranty & Indemnity (W&I) insurance<\/h3>\n

    One of the most significant developments in the Spanish M&A market in recent years is the Warranty & Indemnity (W&I) insurance policy. This product allows an insurer to assume the liability risk for R&W breaches<\/strong>, freeing the seller from the need to maintain escrow arrangements for months or years after closing. Approximately 56% of transactions above \u20ac50 million in Spain now incorporate this type of insurance, facilitating cleaner exits for sellers.<\/p>\n

    Where the parties anticipate using W&I cover, this should be reflected in the LOI so that it conditions the design of the warranty regime from the outset.<\/p>\n

    Management retention and non-compete<\/h3>\n

    In many SMEs the seller is also the chief executive. The LOI should set out the intentions regarding their continued involvement after closing:<\/strong> duration, role, remuneration and any incentive plans tied to post-acquisition targets.<\/p>\n

    The non-compete clause<\/strong> \u2014 restricting the seller’s ability to set up a competing business following the sale \u2014 should also be outlined in the LOI, as it has a direct impact on the value the buyer attributes to the transaction.<\/p>\n

    Conditions precedent and termination provisions<\/h3>\n

    Conditions precedent<\/strong> cover the approvals and consents required for the transaction to close: approval by the buyer’s governing bodies, merger control clearance where notification thresholds are met, third-party consents (customers, suppliers, lenders with change of control provisions) and the absence of a material adverse change (MAC) between signing of the LOI and closing.<\/p>\n

    Termination provisions<\/strong> define the circumstances and process by which either party may withdraw from the transaction without liability, and when withdrawal triggers compensation obligations.<\/p>\n

    The binding clauses that matter most<\/h2>\n

    Exclusivity<\/h3>\n

    Exclusivity is the binding clause of greatest value to the buyer and the one that surrenders the most negotiating leverage when signed by the seller. It commits the seller to refrain from negotiating with other potential buyers for an agreed period \u2014 typically between 30 and 90 days in the Spanish market.<\/strong><\/p>\n

    The signing of exclusivity marks a dramatic shift in negotiation dynamics<\/strong>: before signing, the seller holds the upper hand if a competitive process has been created with multiple interested parties; after signing, the balance of power shifts to the buyer, who gains the right to audit the business and potentially use findings to justify a price reduction (price chipping<\/em>).<\/p>\n

    A well-negotiated exclusivity provision includes a reasonable timeframe, limited extension mechanisms and a penalty payable by the buyer if it withdraws without justified cause \u2014 the so-called break-up fee<\/strong>. In the Spanish private M&A market there is considerable contractual freedom to set these penalties, which can reach significant levels when justified by costs actually incurred by the buyer. A seller who grants 120 days of exclusivity with no reciprocal protection surrenders their most powerful negotiating lever for nothing in return.<\/p>\n

    Confidentiality<\/h3>\n

    Although an NDA is generally already in place, the LOI typically reinforces and extends confidentiality obligations<\/strong> to cover the terms of the offer itself. It must be clear that the existence of the negotiations, the indicative price and the LOI terms are all confidential information. Confidentiality must be mutual and extend to the advisers and employees of both parties.<\/p>\n

    Transaction costs<\/h3>\n

    It must be clear from the outset how process costs are allocated: financial adviser fees, legal fees, due diligence auditors and other experts. In Spain, the prevailing practice is for each party to bear its own costs, unless otherwise agreed.<\/strong><\/p>\n

    LOI versus NBO: practical similarities and differences<\/h2>\n

    The Non-Binding Offer (NBO) and the LOI<\/strong> are documents that share a common nature and function, which frequently causes confusion even among professionals.<\/p>\n

    The NBO is a shorter document focused primarily on establishing the indicative price and basic financial terms. It is the standard instrument in the initial offer phase of a competitive process, allowing the seller to compare positions from multiple buyers before selecting a preferred counterparty.<\/strong><\/p>\n

    The LOI is more comprehensive:<\/strong> it covers financial terms, legal structure, the indemnification framework, timetable, closing conditions and binding provisions. It is negotiated bilaterally following selection of a preferred buyer.<\/p>\n

    In the middle market \u2014 where Maraz Corporate Finance primarily operates \u2014 the two documents frequently overlap<\/strong>. In larger transactions with multiple candidates, the typical sequence is: NBO \u2192 selection \u2192 additional information access \u2192 binding LOI \u2192 SPA.<\/p>\n

    Common mistakes in LOI negotiation<\/h2>\n