What is an LOI and its Legal Value in M&A

In any mergers and acquisitions (M&A) process, the initial negotiation phase is key to establishing the foundations of the transaction. In this context, the Letter of Intent (LOI) is one of the most commonly used documents to structure conversations between buyer and seller.

Although an LOI does not usually obligate the parties to close the transaction, it can generate relevant legal effects if it includes binding clauses, such as confidentiality, exclusivity, or allocation of costs.

For this reason, it should not be treated as a mere formality. In this article, we explain what an LOI is in M&A, what legal value it may have, and what should be reviewed before signing one.

Why the LOI Is Important in an M&A Transaction

The LOI is particularly important because it appears at a stage when the parties have not yet closed the transaction, but already need a minimum framework to move forward in an orderly manner.

In a business acquisition, buyer and seller typically exchange sensitive information, negotiate economic terms, assess closing scenarios, and prepare access to relevant documentation. Without a document to structure this phase, misunderstandings may arise over essential matters such as price, exclusivity, confidentiality, or the perimeter of the transaction.

Therefore, the LOI in M&A should not be seen as a simple formal step. It is a legal and negotiating planning instrument that can significantly influence the development of the entire transaction.

How the LOI Works in M&A: Technical Framework and Legal Value

The LOI has a particular legal nature because it can combine non-binding content with clauses that do generate enforceable obligations between the parties.

In general, the economic and structural aspects of the transaction tend to be preliminary or non-binding in nature. It is common for the letter of intent to include references to the indicative price, the intended transaction structure, the general closing conditions, the estimated timeline, or the initial scope of the due diligence.

These elements are usually subject to subsequent review, particularly following the financial, tax, labour, corporate, and legal analysis of the target company. Therefore, although they help to structure the negotiation, they do not always imply a definitive commitment to execute the transaction on those same terms.

Binding Clauses in an LOI

However, the LOI may also include binding clauses. The most common include the confidentiality obligation, exclusivity for a defined period, allocation of costs, governing law and jurisdiction, rules for communication between the parties, or certain cooperation obligations during due diligence.

Breach of these clauses may have legal consequences and, where applicable, give rise to claims for damages if a loss resulting from the breach is established.

For this reason, the legal value of an LOI depends not only on its name, but on its specific content. A poorly drafted letter of intent may create unforeseen obligations or lead to contradictory interpretations between buyer and seller.

Who Is Affected by Signing an LOI

The LOI primarily affects the parties involved in the transaction: buyer, seller, and, on occasion, partners, investors, or group companies participating in the transaction structure.

In practice, it may be particularly relevant for companies considering the total or partial sale of their business, corporate groups exploring strategic acquisitions, financial investors seeking to acquire a stake in a company, partners negotiating a transfer of shares or equity interests, family businesses undergoing succession processes, partner entry, or divestment, and management teams involved in a corporate transaction.

It also indirectly affects the legal, tax, financial, and labour advisors involved in the transaction, as the LOI conditions the information to be reviewed, the work schedule, and the main points of negotiation for the future share purchase agreement or SPA.

How It Works in Practice in a Business Sale

Typically, an M&A transaction begins with initial conversations between buyer and seller. If there is interest in moving forward, the parties negotiate and sign an LOI. From that point, the due diligence process usually begins, in which the buyer analyses in greater depth the financial, tax, labour, corporate, and legal situation of the target company. If the outcome of that review is satisfactory, the purchase agreement is negotiated and, finally, signed and executed.

The LOI is usually signed before due diligence because it allows the buyer to access relevant information about the company with certain guarantees, particularly regarding confidentiality. For the seller, it also provides greater assurance about the buyer's genuine interest and the preliminary conditions under which the transaction will be analysed.

In addition, the LOI can affect very practical matters, such as whether the seller may negotiate with other potential buyers, the duration of exclusivity, the information to be provided to the buyer, the advisors who will participate in the review, the costs to be borne by each party, and the conditions that must be met in order to move towards the definitive agreement.

A properly structured LOI helps to avoid misaligned expectations and allows each party to understand the true scope of their commitments.

What to Review Before Signing an LOI

Before signing an LOI, it is important to carefully analyse not only the economic terms, but also the legal obligations that may arise from the document.

In this regard, a more structured review is particularly useful, as it allows the main points of attention to be quickly identified before signing a letter of intent.

Key Aspects to Review

Binding or non-binding nature of each clause: It must be clear which sections are legally binding on the parties and which are merely indicative or preliminary in nature.

Exclusivity: If exclusivity is agreed upon, it is important to define its duration, scope, and consequences in the event of breach. Overly broad or poorly defined exclusivity may limit the seller's ability to negotiate.

Confidentiality: The LOI should adequately protect the sensitive information shared during due diligence, particularly financial, commercial, labour, tax, contractual, or strategic data.

Price and adjustments: If an estimated price is included, it should be stated whether it is subject to revision following due diligence, or to adjustments for debt, cash, working capital, or other economic factors.

Duration of the LOI: It is advisable to set a validity period in order to avoid uncertainty or indefinite negotiations.

From a legal perspective, a well-drafted LOI must balance two objectives: allowing the transaction to move forward with flexibility while, at the same time, protecting the parties against unnecessary risks. This balance is particularly important in M&A transactions, where sensitive information is shared and decisions are made with economic, corporate, tax, and labour implications.

At Navarro, we understand that an M&A transaction should not be analysed solely from a financial perspective. The legal security of the transaction requires a thorough review of all legal, corporate, tax, and contractual implications, so that each phase of the process is carried out in accordance with the applicable regulations and with adequate protection of the parties' interests.

Conclusion

The LOI in M&A is a key document in the initial phase of a business sale. Although it does not usually constitute a definitive contract, it can generate relevant legal effects in those clauses agreed upon by the parties as binding, particularly regarding confidentiality, exclusivity, costs, or process rules.

Its correct drafting allows the negotiation to be structured, facilitates due diligence, reduces risks, and prepares the parties more securely for the subsequent signing of the purchase agreement.

For this reason, before signing a letter of intent, its content should be carefully reviewed and its legal implications assessed. In M&A transactions, a well-structured LOI not only helps to advance the transaction, but also contributes to legally protecting the parties from the very beginning of the process.