Selling a business isn't just a strategic decision; it's also a process that requires preparation and negotiation. One of the most decisive stages is signing the letter of intent (LOI). Although it isn't always binding, the LOI in M&A lays the foundation for the future sale and can determine whether the closing of the deal will be a success… or a missed opportunity.
In this article, we explain what an LOI is, what it should include, and how to prepare for the negotiation to protect the seller's interests and maximize the value of the SME.
What is an LOI in the sale of a business?
The letter of intent (LOI) is a preliminary document that sets out the main terms of the agreement between the buyer and the seller before the definitive contract is signed.
Although the LOI in the sale of an SME isn't legally binding on every point, it does define key aspects such as:
- Estimated deal price
- Execution timelines and closing schedule
- Exclusivity clauses
- Confidentiality terms
- General terms of the deal
Having a well-negotiated LOI allows the seller to align expectations, set limits, and strengthen their position from the start of the M&A process.
How to prepare to negotiate an LOI when selling an SME
Preparation is key. An SME that comes to the table having done its homework has a better chance of successfully negotiating its LOI. These are the essential points:
1. Prepare your financial and operational information
Don't do it just because the buyer will ask for it during due diligence. Do it for yourself.
Having your audited financial statements, projections, key contracts, organizational chart, and internal operations up to date will allow you to negotiate with more confidence.
2. Get a business valuation
Before negotiating, you need an objective valuation of your SME.
Looking at balance sheets isn't enough: the industry outlook, the management team, the brand, customer loyalty, and other intangibles also count.
If you don't have experience, you can rely on an advisor specialized in M&A for SMEs. What matters is that you reach the LOI with a clear valuation range.
3. Define your sale objectives
This step is personal and strategic:
- What minimum price do you expect to receive?
- Do you want to keep a stake in the company after the sale?
- How would you like to secure the team's future?
- What role would you like to have after the deal?
Negotiating an LOI without defined objectives can leave you with an unsatisfactory outcome, even if the price seems attractive.
4. Pay attention to exclusivity and confidentiality clauses
Exclusivity determines whether you can talk to other buyers while the negotiation lasts.
Confidentiality protects the company's sensitive information: it establishes which data is confidential and for how long. Both clauses are essential to protect the seller.
5. Be clear about the form of payment
Although it's negotiated later, it's worth knowing what you prefer from the outset:
- Full payment in cash.
- Mixed payment (cash + equity).
- Earn-outs or variable payments tied to results.
Being clear about the payment structure will allow you to defend your position from the LOI stage.
Conclusion: the LOI as the starting point for success
A well-negotiated LOI doesn't guarantee the successful sale of your SME, but it does increase the chances of achieving it. Conversely, a poorly framed letter of intent can shape the entire M&A process.
Preparing in advance, aligning expectations with your partners, having solid financial information, and paying attention to the exclusivity, confidentiality, and payment terms will make the difference.
In short: negotiating the LOI is the first major test in successfully selling your SME.
