A preliminary, typically non-binding document in which buyer and seller set out the essential terms of a proposed acquisition before commencing due diligence.
The letter of intent is the document that transforms a conversation into a transaction. Until the LOI is signed, there is interest but no commitment. After signing, there is a clear framework within which both parties will invest time, money, and resources towards a deal. Getting the LOI right — knowing what to insist on and what to leave for later — is one of the most important skills in M&A.
A letter of intent (LOI), also known as a heads of terms, term sheet, or memorandum of understanding, is a document that sets out the principal commercial terms of a proposed acquisition. In the Spanish mid-market, it is typically signed after initial discussions and before the buyer commences formal due diligence.
The LOI occupies a critical middle ground: it is detailed enough to confirm that both parties are broadly aligned on the key terms, but flexible enough to allow for adjustments based on what the due diligence reveals.
The key characteristics of an LOI are:
A well-drafted LOI in the Spanish mid-market typically addresses:
The parties. Who is buying and who is selling. This includes identifying the ultimate beneficial owner on the buyer’s side, which matters when the buyer is an investment vehicle.
The target. What is being acquired — shares, assets, or a combination. The percentage of ownership being transferred.
Price indication. The proposed enterprise value and the basis for calculation (e.g., “6.5x normalised EBITDA estimated at 3.2 million, subject to due diligence confirmation”). Whether the price is a fixed amount or will be adjusted based on closing accounts, and any earn-out or deferred consideration.
Price adjustments. The mechanisms for adjusting the headline price — typically for net financial debt and working capital at closing.
Structure and funding. How the buyer intends to finance the acquisition (own funds, debt, a combination). Whether a new holding company will be created.
Conditions precedent. What must happen before the transaction can close: satisfactory due diligence, regulatory approvals, board or shareholder consents, third-party approvals.
Timeline. The proposed schedule: duration of exclusivity, expected due diligence period, target signing date, and target closing date.
Exclusivity. The period during which the seller agrees not to negotiate with or provide information to other potential buyers. This is one of the most important clauses and is typically binding.
Key post-closing arrangements. The founder’s role after closing, non-compete obligations, transition assistance, and any continued involvement.
Costs. Each party bears its own costs up to closing. Break fees (compensation if one party withdraws) are rare in the Spanish mid-market but do occur in competitive processes.
The LOI sets the anchor for the entire negotiation. The commercial terms agreed in the LOI — particularly the price indication and the structure — are very difficult to improve on later. This is not because they are legally binding (they usually are not), but because both parties invest significant time and money based on those terms, creating a strong psychological and practical commitment.
For the seller, the LOI is the moment to secure the best possible terms. Negotiating hard at the LOI stage is expected and respected. Trying to renegotiate terms that were already agreed in the LOI — without new information justifying the change — is a red flag that damages trust.
For the buyer, the LOI is the moment to set realistic expectations. An overly aggressive LOI may win the exclusivity race but creates problems later: if the buyer needs to reduce the price significantly after due diligence, the seller will feel misled, and the deal may collapse.
Exclusivity is the clause that gives the buyer the space to conduct due diligence without worrying that the seller is running a parallel process with competitors. For the buyer, it is essential — committing 50,000-200,000 euros in due diligence costs without exclusivity is a risky proposition.
For the seller, granting exclusivity has a real cost: it takes the company off the market for the exclusivity period. If the buyer ultimately does not proceed, the seller has lost months and may have missed other opportunities.
The negotiation usually revolves around:
A food production company with 25 million in revenue and a normalised EBITDA of 3.4 million receives two LOIs after a structured sale process:
LOI A (industrial buyer): Offers 7x EBITDA (23.8M enterprise value), 100% acquisition, requires 90 days exclusivity, the founder must stay for 12 months, non-compete of 3 years.
LOI B (Blue Mountain): Offers 6.5x EBITDA (22.1M enterprise value), acquires 80% with founder retaining 20%, requires 75 days exclusivity, the founder stays as non-executive chairman for 3 years, no forced exit date for the founder’s remaining 20%.
The founder, who values ongoing involvement and a longer transition, chooses LOI B despite the lower headline price. The 20% retention gives them continued upside if the company grows, and the flexible exit timeline aligns with their personal plans.
Mostly not, but partially yes. The commercial terms (price, structure) are typically non-binding, meaning neither party can be forced to complete the transaction on those terms. However, specific clauses are binding: exclusivity, confidentiality, cost allocation, and the obligation to negotiate in good faith. Breaching the binding provisions — for example, negotiating with a competing buyer during the exclusivity period — can give rise to legal claims.
Yes, the non-binding nature of the price indication means the buyer can propose adjustments based on due diligence findings. This is expected and normal. The question is whether the adjustment is proportionate to the finding. A tax contingency of 300,000 euros justifying a 300,000 euro price reduction is reasonable. Using minor findings as a pretext to reduce the price by 15% is bad faith and will likely kill the deal.
No. Even though the LOI is mostly non-binding, it sets the framework for the entire transaction. The binding clauses (exclusivity, confidentiality) have real legal and commercial consequences. And the non-binding terms, while not enforceable, create the anchor around which all subsequent negotiations revolve. Legal advice at this stage is essential — and it is far less expensive than the cost of agreeing to disadvantageous terms that you later cannot renegotiate.
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