Why Short, Non-Binding LOIs Put You in a Stronger Position
I've seen more than one twenty-page Letter of Intent (LOI) handed over by a buyer, setting out in advance most of the provisions that would normally be negotiated in the Share Purchase Agreement (SPA). In practice, it's a condensed SPA disguised as an LOI—typically drafted entirely in the buyer's favour and packed with onerous terms.
I've also experienced the opposite.
An entrepreneur tells me, before signing an LOI:
"Joshua, we should also include the managers' salaries and planned increases over the next three years, a 20% cap on the reps & warranties, a three-year survival period for tax warranties, a commitment to keep the office in northern Madrid, and we should define 'Good Leaver' and 'Bad Leaver' now so they can't catch us out later."
That's usually where I stop the conversation and explain that all of those issues can—and should—be negotiated later.
Let's Start at the Beginning
In a typical lower mid-market transaction (roughly €5 million to €100 million in enterprise value), the process generally works like this.
Several potential buyers receive limited information after signing an NDA: the Information Memorandum, one or more management meetings, a Q&A process and perhaps an initial package of documents.
Not a fully populated data room where they can conduct a complete due diligence.
Based on that information, each prospective buyer submits an offer in the form of an LOI, which is usually non-binding and subject to satisfactory due diligence. The successful bidder will normally request a period of exclusivity to carry out that due diligence.
Large-cap transactions work differently.
In deals above, say, €100 million in enterprise value, the seller prepares a comprehensive data room from day one. Multiple bidders conduct due diligence simultaneously while competing against one another, and the winning bidder signs a binding LOI because the substantive work has already been completed before signing.
That model only works for larger transactions.
In smaller deals, buyers are simply not willing to invest the time and money required for full due diligence when they may only have a small chance of winning the process. The economics just don't work.
Legally Non-Binding, Morally Significant
If an LOI is non-binding and subject to due diligence, it has very limited legal effect. Neither party is legally obliged to honour what has been written.
So why negotiate something that isn't legally enforceable?
It's a fair question.
A non-binding LOI can theoretically be renegotiated from top to bottom. Nothing legally prevents either party from changing the price, the structure or almost any other commercial term.
In practice, however, very few experienced buyers—those who have completed multiple M&A transactions—will walk away from the terms they themselves proposed without a compelling reason.
Doing so is considered poor form within the industry.
A buyer who attempts to renegotiate agreed terms without justification sends a very clear signal about how they intend to behave throughout the remainder of the transaction—and perhaps even after closing.
So while a non-binding LOI may not create legal obligations, it does create a strong moral commitment.
Does It Make Sense to Negotiate Everything Before Due Diligence?
If virtually every provision in the LOI may ultimately be affected by the findings of due diligence, it is worth asking whether negotiating every detail beforehand really makes sense.
Some buyers nevertheless try to do exactly that, and not without reason.
They have developed a strategy.
In a market full of acquisition opportunities, they prefer to negotiate from a position of maximum leverage before due diligence rather than afterwards, when their negotiating power is significantly weaker.
"These are our terms. They're the same for everyone. Take them or leave them."
Once due diligence has been completed, the buyer's position changes considerably.
By then, they have already spent substantial sums on financial, tax and legal advisers. Their internal teams have invested significant time. In many cases, they have also committed reputational capital with their investment committee.
Walking away is no longer cost-free.
A good sell-side adviser understands this and knows how to use that shift in negotiating leverage.
My View
Since a non-binding LOI carries limited legal weight, I prefer to agree only five or ten key commercial points and make it absolutely clear that those are fixed.
Everything else can be negotiated later, once everyone is comfortable with both the transaction and the results of due diligence.
That later stage is when meaningful negotiations should take place.
By then, the buyer understands the company's actual risks and opportunities, wants to proceed and has often invested six figures in the due diligence process.
The seller is equally committed, having opened the company's books and declined discussions with other potential buyers.
Both parties are invested, and both want the deal to close.
With complete information on the table and genuine commitment from both sides, reaching the balance required for a true win-win outcome becomes considerably easier.
What a Short LOI Should Include
In my view, a Letter of Intent should fit comfortably within one or two pages and include only the essentials:
Not much more.
There will be plenty of time to debate the hundred pages of the SPA once the buyer's lawyers have drafted it.
For example, what is the point of asking a buyer to commit today that they will never require an escrow if, after due diligence, they uncover a significant issue and say:
"We didn't know about that tax exposure because neither of us knew it existed. Under those circumstances, you can surely understand why we can't stick to what we originally proposed."
And frankly, there would be very little we could say in response other than pointing out that they signed the LOI.
The Exceptions Worth Addressing Upfront
I like keeping the fundamentals of an LOI—price, structure and exclusivity—as short as possible.
In most transactions, that's all you need because everything else is fairly standard.
Occasionally, however, a company has a specific characteristic that is almost certain to become a major point of negotiation later. In those situations, it makes sense to address it before moving forward.
For example, we once advised a company that had received government grants in six of the previous seven years.
From our perspective, those grants clearly formed part of recurring EBITDA.
However, we knew that a buyer might later argue that "government grants are never recurring" and attempt to exclude them from the EBITDA calculation after due diligence.
We therefore made sure the treatment was explicitly addressed in the LOI before signing.
In another transaction, a client had purchased substantially more inventory than it needed after taking advantage of an exceptional offer from a supplier.
The amount was significant.
We wanted the LOI to acknowledge both the excess inventory and how it would be treated, rather than leaving the issue to a later debate over what constituted "normal" working capital.
In our view, at least part of that excess inventory deserved to be reflected in the purchase price.
In another case, during a management meeting, the buyer casually mentioned that its group charged management fees to its subsidiaries.
We immediately realised this could materially affect future EBITDA and therefore any earn-out calculation.
We insisted that the amount be expressly addressed in the LOI so it wouldn't become an unpleasant surprise when the earn-out was eventually calculated.
The reasoning was identical in all three cases.
We knew those issues would become material points of negotiation, so we preferred to resolve them while goodwill still existed between the parties.
Final Thoughts
Ultimately, my advice on LOIs is very similar to the advice I give clients throughout the sale process.
The less ammunition you waste fighting the wrong battles, the more you'll have available for the ones that truly matter.
Joshua Novick
Managing Partner,Bondo Advisors
cloud technology axon
Ultimately, my advice on LOIs is very similar to the advice I give cli...
