Are you about to acquire a company or become a shareholder?
Or selling your company?
The Letter of Intent (LOI) is a key element in the success of any transactional process.
AKCEAN works with you to develop a transparent LOI based on your objectives and interests. Avoid misunderstandings and secure your transaction with a well-drafted LOI.
What is a letter of intent, and what are its key issues?
The letter of intent is the document by which sellers and buyers formalize their negotiations. Following initial discussions and analysis, the letter of intent details the essential points on which the parties intend to enter into a contract.
It is usually drafted on the buyer’s initiative , but sellers are well advised to include all the points they wish to see included in the final contract. Once this stage has been completed, it becomes much more difficult to introduce new elements into the negotiations.
The letter of intent clarifies the grey areas that may be present in a business takeover or investment project. Although it is not a legal requirement, it is highly recommended. It is an affirmation of the company’s willingness to contract and negotiate, while defining the scope of discussions and the limits of negotiations.
If you are the seller :
- The letter of intent represents an official intention to buy your company, clarifies the motivation of a potential buyer, and assures you of a genuine interest.
- The letter of intent enables you to reach agreement on the essential elements of the sale transaction, and to clarify the specific commitments you expect from the buyer.
- The letter of intent allows you to communicate confidential information about the company with greater peace of mind.
If you are the buyer :
- The letter of intent assures you that the seller is willing to sell his business to you. It is at this point that you can initiate the acquisition audits, which entail significant costs.
- The letter of intent enables you to reach agreement on the essential elements of the transaction, and to clarify the specific commitments you expect from the seller.
- The letter of intent will stabilize negotiations by avoiding an auction effect, and may offer you a period of exclusivity. You can then take advantage of this period to carry out acquisition audits, and possibly make a firm and definitive offer.
What should a letter of intent contain?
The purpose of the letter of intent is to detail the planned transaction as clearly as possible. It specifies the conditions and intentions of each party, so as to validate points of agreement and remove points of disagreement.
It is therefore important to include clauses that you will find in the final contractual documentation of the transaction. The content of the letter of intent is not limited solely to the price, which is only one element of the transaction. Other conditions need to be mentioned, such as non-competition clauses, asset and liability warranties, post-transaction support for sellers, and so on.
The letter of intent has no formal requirements. Neither its content nor its form are subject to any particular rule, and its content may vary according to the purpose of the negotiations and the commitment of the parties. However, we recommend that you include the following points:
- Subject of negotiation
- Presentation of the parties
- The buyer’s reasons for entering into the transaction
- Indicative transaction price, detailing the pricing mechanism
- Terms of payment
- Financing of the transaction
- Guarantee of assets and liabilities (GAP), under which the seller undertakes to compensate the buyer in the event of a reduction in assets or a reduction in liabilities after the sale, the causes of which predate the sale. The terms and conditions of the GAP must be anticipated (amount, duration, trigger threshold, possible deductible, activation mechanism, guarantee of the guarantee)
- Support for sellers
- Non-competition undertaking
- Confidentiality of information, offer and transaction
- Exclusivity period
- Conditions required to complete the transaction
- Transaction timetable
- Legal value
- Offer validity period
In the case of a minority investment, the letter of intent may also contain the following non-exhaustive information:
- Investment terms (amount, instruments used)
- Valuation retained
- Envisaged governance
- Rights granted to investors
- Exit strategy
What is the value of the letter of intent?
The legal value of a letter of intent is essentially determined by its content.
Often drawn up as a private document, the letter of intent is in principle a non-binding document with no contractual value in relation to the final contract. It serves as a moral crystallization of an agreement. The parties undertake to enter into negotiations under the conditions they have set out. The letter of intent may trigger exclusive negotiation rights, but is not intended to guarantee that the planned contract will necessarily be concluded.
Contractual value – Abusive termination of talks
A letter of intent may nevertheless have contractual value, and be perceived as a contract in its own right. In this case, the defaulting party may be held contractually liable. As the parties may evoke real commitments in its content, they may be held liable in particular in the event of a so-called abusive breach of talks, or if it is deemed that one of the parties has not shown good faith in the negotiations.
As each letter of intent has its own characteristics and commitments, it is advisable to consult a legal professional who will be able to verify its legal scope and assess whether it is binding or not. This will depend more on its content than on its title!
Last update: October 2023
