A letter of intent is a key document in the M&A process. It’s essential that buyers and sellers understand what it is and how to maximise value.

In this article, we’ll tell you everything you need to know about letters of intent and how to write one if you’re buying or selling a business.

What is a letter of intent in M&A?

An M&A letter of intent (LOI) is a formal document that outlines the key terms and conditions of a potential business transaction. While typically non-binding, it sets the groundwork for the due diligence process and the eventual purchase agreement. Essential components of an LOI include:

• Identification of the parties involved

• Company being acquired

• Basic terms of the deal

• Due diligence process

• Binding agreements

• Purchase price

In most cases, the prospective buyer sends an LOI to the seller as an initial show of serious intent. If accepted, the document serves as a blueprint for moving forward with the M&A deal. If the seller accepts the LOI, both parties will sign the document and move straight into the due diligence stage of the transaction.

Why is an M&A LOI important?

Saves time and money

An LOI is essential because it puts the terms and conditions of the final M&A deal into writing. Having clear terms minimises misunderstandings and makes it easier for the buyer and seller to negotiate and reach a mutual agreement.

Working through an LOI saves time and money by allowing all parties to determine if there is an agreement of basic terms early on. This helps to avoid delays and issues later down the line.

Improves transparency

LOIs improve clarity and transparency during M&A deals. They provide the buyer and seller with a roadmap during the M&A process and become the outline for the purchase agreement.

Creates trust

A well-crafted LOI demonstrates that the buyer is acting in good faith. It fosters a sense of trust between the parties, which is vital for open communication and the successful completion of the M&A process.

Increases success rate

Negotiating a detailed LOI at the outset of an M&A deal significantly increases the chances of a successfully completed transaction.

An LOI makes sure that everyone is on the same page and improves the speed and efficiency of the M&A process.

Is an M&A LOI binding?

Generally, an LOI is non-binding. However, it can contain binding clauses related to confidentiality, exclusivity, or the due diligence process. While most terms remain flexible, it's important to be aware that some legal commitments may arise, depending on how the LOI is drafted. Seeking guidance from an M&A advisor or business broker can help ensure you're protected when negotiating the terms.

Suggested reading: Is a Letter of Intent Legally Binding?

Tips to write a good LOI in M&A deals

• Keep your LOI concise: A letter of intent should be between 2-3 pages long, although some are as little as one page. Make your LOI short and engaging.

• Establish the right tone: Your LOI can be formal and direct, but it shouldn’t sound aggressive. Focus on writing a persuasive argument that will make the seller feel like they’re getting a good deal.

• Use a free template: You can download a template if you want help writing an M&A letter of intent. When you join Foundy, you'll gain access to free templates for LOIs, share purchase agreements, and other critical M&A documents.

• Prepare for negotiations: An LOI often opens the door to further negotiations. Be prepared to revise clauses and conditions, and approach these discussions with a clear understanding of your priorities. Step-by-step expert support from an M&A broker or business transfer agent can be invaluable during this phase.

• Seek advice from an M&A expert: An M&A expert can give you guidance on the M&A process including how to write a good LOI and negotiate with sellers. Browsing an M&A advisor directory is one of the easiest ways to find a professional that suits your needs.

Final Thoughts

An M&A letter of intent is one of the first documents negotiated in most M&A deals. It outlines key terms of the deal, improves transparency, and creates trust between the buyer and seller.

A well-written LOI will save all parties time and money and improve the chances of successfully closing the transaction. Its importance should not be overlooked!

Ready to Discover Your Business' Value?

Running a business and navigating the decision to buy or sell another can feel overwhelming. While some business owners enjoy managing the process on their own, many benefit from working with M&A advisors who offer sector-specific expertise. Foundy’s advanced portal and Find An Advisor programme provide the tools and educational resources you need to confidently handle your next acquisition or sale.

Join Foundy if you are looking to buy or sell a business, and access free document templates to support your M&A journey. With access to over 1.1 million transactions, Foundy provides the deal flow and resources to help you achieve your business goals. As part of our M&A advisory services, we offer step-by-step expert support to help you find the right acquisition or prepare your company for a profitable sale.If you're a buyer, Foundy offers M&A advisory services across a wide variety of industries. We can help you find your next acquisition and streamline your end to end process via an all in one portal.

Whether you're a buyer looking to streamline your acquisition process or a seller aiming to sell your business, Foundy’s all-in-one portal offers a seamless experience. For sellers, it starts with a free business valuation, ensuring that you understand your company’s current position and the steps needed for a successful exit. Foundy provides clients with our proven Triangular Model, which combines expert advisors and data-driven insights to deliver accurate, comprehensive assessments.

Learn more at Foundy.com.