Letter of Intent (LoI)
Important aspects and tips for drafting a letter of intent.
6. Dezember 2024 von Götz Kehrein
The Letter of Intent (LoI), a central Memorandum of Understanding in company sales processes, is signed after the initial contacts and negotiations. It serves as the basis for all further steps and is drawn up before the Due Diligence located. While each company sale has its own characteristics, there are general checkpoints that are typically addressed in an LoI.
Letter of Intent Definition
The Letter of Intent (also known as Memorandum of Understanding) is not a special term from the area of mergers & acquisitions. Rather, it is a tried and tested tool from all sectors in which complex negotiations be guided.
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More InformationThis is an agreement in principle which signals a serious interest in further steps between the negotiating parties. All contracting parties declare in writing that they are ready for further contract negotiations and in a successful conclusion of the M&A process interested are.
Memorandum of Understanding - Mehr als nur eine alternative Bezeichnung zum Letter of Intent
The Memorandum of Understanding (MoU), often used synonymously with the Letter of Intent, deserves a separate consideration. While the LoI is mentioned more frequently in the context of company acquisitions, the MoU is used in a wider range of agreements. It is not only about the purchase of companies, but can also be used in other co-operations or partnerships.
The MoU usually emphasises the mutual intention to cooperate and sets out the basic principles and framework of the cooperation. Although it fulfils similar functions to the LoI, in some contexts it can be seen as a more formal step that forms the basis for further detailed agreements.
Letter of Intent: Leitfaden für rechtliche und finanzielle Sicherheit
First of all, it should be noted that the LoI is in principle No legal binding force owns. The conclusion of a Memorandum of Understanding is no guarantee for the success of further negotiations.
Zwar können einzelne Passagen mit Verpflichtungen einhergehen ? so könnte beispielsweise ein vertragswidriger Umgang mit sensiblen Daten rechtliche Konsequenzen nach sich ziehen - eine übergeordnete Verbindlichkeit entsteht jedoch nicht.
Frequently in the M&A process, the question of the Need for a Letter of Intent is a challenge. After all, there are costs involved, and medium-sized companies in particular are rashly questioning this important instrument for success. However, experience shows that an LoI is worth a lot for both the seller and the buyer.
The letter of intent is ‘only’ a declaration of intent, which is legally non-binding with regard to the actual conclusion of the contract, but at the same time the Seriousness and essential cornerstones of the negotiations expresses.
An important component of an LoI is the consensual documentation of the state of negotiations. This point often leads to misunderstandings about what has already been agreed upon or “only mentioned once”. Therefore, it is important to describe the planned project and to define its components precisely.
Can legal or financial risks arise from an LoI?
The letter of intent is merely a special designation and does not change the fact that it is a kind of contract. All clauses agreed in this document are valid. This is also in the so-called ?hard LoI? which includes concrete and legally binding declarations. In order to exclude risks, the LoI should be drawn up with the help of a company sale consultancy. and a lawyer.
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Letter of Intent Template / Sample (pdf)
We offer you the sample wording Letter of Intent Sample Template of the IHK Frankfurt for download.
Difference between contract and preliminary contract? The preliminary contract is already a legally binding documentwhich obliges the parties to the contract to conclude the final Company purchase agreement to conclude a contract. This obligation can only be terminated for reasons or with consequences specified in the preliminary contract. The letter of intent, on the other hand, even in its hard form, cannot be classified as a preliminary contract.
Legal or financial risks?
Der Letter of Intent ist in der Regel, wenn alle festgelegten Bedingungen ordnungsgemäß eingehalten werden, frei von Risiken und bietet gleichzeitig eine Absicherung gegen Missverständnisse.
However, the ’stipulated conditions’ may conceal a Loophole for risks. If the LoI is drawn up with problematic passages, so that it is more like a preliminary contract than a classic LoI, this can lead to problems.
Absichtserklärung: Vorteile und Einsatzmöglichkeiten im Unternehmensverkauf
In principle, it should be noted that the Letter of Intent for each Company sale is recommended. Although the scope and content may vary, the Advantages from this document cannot be dismissed out of hand. The direct benefit of the declaration of intent results from the Psychological and moral impact. Both parties can be a little more certain about the seriousness of the other party. So if there are any doubts, they can be dispelled or at least reduced by the LoI.
Another practical use case concerns scheduling. One in the Memorandum of Understanding Jointly agreed schedule helps to set the pace for the Company acquisition or even accelerate it. Because experience shows that the longer it takes, the more likely it is that it will fail.
Reasons for delays can be tactical “games” or simply indecision on the buyer or seller side. The possible Assurance of an exclusivity period for the buyer gives the interested party, for example, the security of being able to concentrate on the following steps with the LoI now and no longer having to look compellingly to the right and left.
In the course of the negotiations, the most intimate company data is disclosed. Therefore, another point, the Agreement of absolute secrecy, to be agreed more precisely with the LoI than in the case of the exposé handover, which can also lead to the enforcement of claims for damages in the event of a breach.
Letter of Intent - M&A
The principles of the letter of intent mentioned above also apply to the special case of mergers and acquisitions. In addition to Purchase price and details on the structure of the company sale (what exactly is being sold?), the letter of intent here contains regulations on how to proceed (e.g. scope of the company audit / Due Diligence), a timetable, a confidentiality agreement as well as provisions on the assumption of costs and the possible termination of negotiations.
In many cases, the LoI also includes a Exclusivity This means that the seller may not negotiate with any other interested parties during this period. Many sellers make the mistake of choosing a period that is too long and forget to negotiate a ?Stand-by mode? to be agreed.
How is it negotiated and what should you look out for?
The negotiation process for a Letter of Intent ultimately resembles a Discussion on the relevant points. Both parties discuss their ideas and agree on certain key points. It is essential to ensure that points are also discussed that one party takes for granted or has already clarified. It often turns out that previously non-binding statements are no longer valid when the letter of intent is formulated.
Last but not least, the question is often asked, who pays the costs for the LoI. A better question here would be, who determines what is written in it? Because a joint agreement binds both sides and carries more weight than a verbal declaration of intent.
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Design LoI
Although the LoI brings with it some scope for design, a few key points are helpful.
Letter of Intent Contents
An essential part of the letter of intent is the clear naming and identification of contractual partners, including their roles and responsibilities in the context of the envisaged transaction. This definition is particularly critical in complex negotiations such as mergers & acquisitions in order to avoid misunderstandings and lay a solid foundation for the subsequent steps.
In addition to naming the contractual partners, the following content is typically included in the LoI:
- Explanation of the interest in the respective transaction.
- Recording the current status of negotiations: This includes concrete statements about the M&A project, such as the sale of the company, the purchase price and other components of the price structure.
- Scheduling: This includes the time frame for the due diligence and other important milestones.
- Authorisations for audits by third parties: Rules for reviewing the transaction.
- Reservations and special conditions: These may include specific requirements or exceptions.
- Confidentiality obligations and regulations on the disclosure of documents.
- Indications of the lack of binding effect of the letter of intent and reasons for a possible termination of the negotiations.
- Rules for reimbursement of expenses and exclusivity clauses.
NDA: Non-Disclosure Agreement
The Non-Disclosure Agreement will referred to in German as Geheimhaltungsvereinbarung and drawn up either in parallel with or as part of the Letter of Intent. The parties undertake to keep the contents of the negotiations or even the existence of negotiations themselves confidential.
As the importance of confidentiality certainly does not need to be explained further, the NDA creates a basis of trust for all parties involved. The special status of the non-disclosure agreement also means that it not placed without special positioning in the Letter of Intent is made. This makes it easier to implement the consequences of violations.
Conclusion
A Letter of Intent (LoI) is a declaration of intent that is signed before further negotiations and before the due diligence phase. Although the LoI is not legally binding in principle, it signals the seriousness and the key points of the negotiations. It is important to draft the LoI precisely and to document the state of negotiations in a consensual manner in order to avoid misunderstandings. A LoI can have psychological and moral effects, and it can help with timing.
It is advisable to LoI with professional Company sale consulting and support of a lawyer to composein order to exclude legal and financial risks. In the M&A context, the LoI contains additional provisions on the further procedure, assumption of costs and possibly exclusivity.
A non-disclosure agreement (NDA) is often parallel to the LoI written in order to ensure the confidentiality of the negotiations.
About the author
Götz Kehrein
Born 1963, business graduate, specialisations: Auditing, tax and business law, certified Change Manager (IHK), certified Business Coach & Bussiness Trainer (according to DVCT standard). Expert for company succession, company acquisition, sale and valuations in Hamburg, Schleswig-Holstein and Mecklenburg-Western Pomerania. Many years of management experience with an international financial services provider. Special expertise: Change management, process optimisation, crisis management and communication, corporate finance, restructuring, strategy development and start-up support. Experienced routine and expertise from numerous M&A processes on the buyer side and as a consultant for company succession, valuation, purchase and sale in the SME sector. Qualified speaker and trainer on the subject of company succession and generation change. Member of the “Stabwechsel-Team” of the Hamburg Chamber of Commerce and the Lübeck Chamber of Industry and Commerce.