Illustration of a letter of intent or declaration of intent

Letter of Intent (LoI): What is a Letter of Intent and what should be looked for?

Although each company sale must be considered individually, there are nevertheless some checkpoints that are usually run through.

This is also the case with the Letter of Intent (LoI for short), which, after initial contacts and negotiations, is used as the Memorandum of Understanding is signed. It represents a basis for the further steps and is to be classified chronologically before the due diligence.

Table of contents

Letter of Intent Definition

The Letter of Intent (also known as Memorandum of Understanding) is not a specific term from the field of mergers & acquisitions. Rather, it is a tried and tested tool from all sectors in which complex negotiations be guided.

This 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 are interested in a successful conclusion of the M&A process are interested.

Letter of Intent - What is there to consider?

First of all, it should be noted that the LoI is in principle No legal binding force owns. The conclusion of an LoI is no guarantee for the success of further negotiations. 

Although individual passages may be accompanied by obligations ? for example, handling sensitive data in breach of the contract could have legal consequences ? there is no overarching obligation.

Frequently in the M&A process, the question of the Need for a Letter of Intent posed. After all, costs are incurred and medium-sized companies in particular are prematurely questioning this important success tool. 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 part of an LoI is the consensual documentation of the state of negotiations. This is a point where misunderstandings often arise about what was already perceived as agreed or "just mentioned". It is therefore 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 type of contract. All clauses agreed in this document are valid. This also becomes clear in the so-called 'hard LoI', which includes concrete and legally binding declarations. In order to exclude risks, the LoI should be drafted with the help of a Company sale consulting 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 document that commits the contracting parties 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.

Letter of Intent Checklist for Business Buyers

Legal or financial risks?

The letter of intent is usually free of risk if all the conditions laid down are properly observed. 

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.

When is a letter of intent useful?

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 benefits from this document cannot be denied.

The direct benefit of the Memorandum of Understanding 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 time planning. A jointly agreed timetable in the MOU 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 part of the buyer or seller. The possible assurance of an exclusivity phase 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 necessarily look 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 basic principles for the letter of intent mentioned so far also apply to the special case of mergers & acquisitions. In addition to the purchase price and details on the structure of the company sale (what exactly is being sold?), the letter of intent here contains regulations on the further procedure (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 with other interested parties.Stand-by mode" to agree.

Letter of Intent Checklist for Business Sellers

How is it negotiated and what should you look out for?

The negotiation process for a letter of intent ultimately resembles a discussion about the relevant points. Both parties discuss their ideas and agree on certain key data. It is essential to ensure that points are also discussed that one party takes for granted or that have already been 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.


Design LoI

Although the LoI brings with it some scope for design, a few key points are helpful.

Letter of Intent Contents

The individual passages of the LoI should always be designed individually. Nevertheless, some basic aspects have emerged that should be taken into account.

  • Designation of the contracting parties
  • Presentation of the interest in the respective transaction
  • Keeping a record of the state of affairs
  • Concrete statements about the M&A project (e.g. Sell company) Especially the purchase price and possible further components of a price structure have to be defined exactly.
  • Timetable (also in relation to the following due diligence)
  • Issuance of powers of attorney for subsequent third-party audits
  • Reservations and special conditions
  • Duties of confidentiality and explanation of exceptions and consequences
  • Rules on the disclosure of documents
  • Important: Reference to the lack of binding effect of the declaration of intent
  • Stating any reasons for terminating the negotiations
  • Rules for reimbursement of expenses
  • Clauses regarding exclusivity

NDA: Non-Disclosure Agreement

The Non-Disclosure Agreement is referred to in German as Geheimhaltungsvereinbarung and is 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.

Since the importance of confidentiality certainly does not need to be explained further, the NDA results in a basis of trust for all parties involved. The special position of the non-disclosure agreement also means that it is not placed in the letter of intent without special positioning. In the event of violations, the consequences can be implemented more easily.

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