LOI (Letter of Intent): What It Is and Key Clauses in M&A

The letter of intent (LOI) —known in Spanish as the carta de intención— is one of the most important documents in any mergers and acquisitions (M&A) deal. It's the moment when buyer and seller formalize, for the first time, their intention to move forward with a negotiation on specific terms.

In this guide, we explain exactly what an LOI is, which clauses it should include, when in the process it's signed, whether it's binding or not, and the most common mistakes to avoid when negotiating it.

‍What is an LOI or letter of intent

An LOI (letter of intent) is a document in which the buyer or investor formally states their intention to acquire a company, setting out the preliminary terms of the deal. It's the first concrete offer on the table, after the initial conversations and the review of the teaser.

Although most of the clauses in an LOI are non-binding (that is, neither party is legally required to close the deal), it does set the framework for the negotiation: indicative price, structure, timelines, and the conditions for moving on to due diligence.

In practice, the LOI is an agreement that shows the real commitment of both parties to invest time and resources in moving forward. Without a signed LOI, no reasonable company would open its books for due diligence.

LOI vs. NBO vs. term sheet: how they differ

M&A jargon uses different terms for similar documents, which often causes confusion:

1. LOI (letter of intent): a letter of intent, generally non-binding. It's the broadest term and is used in deals of any size.
2. NBO (non-binding offer): a non-binding offer. In large deals with a competitive process (several buyers), it's usually the document submitted before due diligence, in which each bidder presents its initial offer.
3. Term sheet: a summary of terms. More common in venture capital deals or startup investments, it tends to be more schematic (table format) and technical.
4. MoU (memorandum of understanding): similar to the LOI, but with a more formal tone and sometimes with more binding clauses.

In deals involving Spanish SMEs, people usually just talk about the LOI, assuming it's non-binding except for the clauses specifically marked as such (confidentiality, exclusivity, expenses).

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When in the process is an LOI signed

The LOI is signed at a specific stage of the sale process, neither too early nor too late:

1. Initial contact and NDA: buyer and seller sign a non-disclosure agreement so they can exchange information.
2. Review of the teaser and the information memorandum: the buyer analyzes the opportunity with the information available.
3. Exploratory meetings: the parties hold conversations to understand the business, the team, and the seller's motivations.
4. Signing the LOI: once there's real interest, it's formalized with specific terms. ⬅️ We are here
5. Due diligence: the buyer analyzes the company in depth.
6. Negotiating and signing the SPA: the deal closes with the definitive agreement.

If you want to see the full process step by step, we recommend our guide to the 5 stages of buying and selling a business.

What clauses should an LOI include

A well-drafted LOI should address every key aspect of the future deal, even if only preliminarily. The clauses it can't do without are:

1. Deal structure

It defines exactly what is being acquired: 100% of the shares? A partial stake? Only certain assets? This decision has very different tax, legal, and operational implications for both parties.

2. Price and payment terms

It states the proposed price (or an indicative range) and how it will be paid: part at closing, an earn-out tied to future targets, escrow to hold back funds for warranties, financing, and so on. It's the most sensitive clause and the most heavily negotiated.

3. Conditions for moving forward

The milestones that must be met to move on to the next stage: for example, completing due diligence with no material findings, obtaining regulatory approvals, securing bank financing, and so on.

4. Exclusivity

This clause is binding. It establishes that the seller commits not to negotiate with other buyers for a set period (usually 30–90 days). It gives the buyer assurance that the seller is serious, since the buyer is about to invest time and money in due diligence.

5. Confidentiality

Even if an NDA is already in place, the LOI usually includes a clause reiterating that all information exchanged and the terms of the LOI itself are confidential. This clause is binding.

6. Expenses

How the costs associated with the deal are shared: fees for lawyers, advisors, audits, and so on. Typically, each party bears its own expenses.

7. Term and termination

The period during which the LOI is in effect and the conditions under which either party can end the negotiation.

Is an LOI binding?

The right answer is: it depends on each clause. The LOI is a “hybrid” document in which:

1. Non-binding: the price, the general structure, the indicative timelines, and most of the commercial terms. The parties can walk away without legal consequences.
2. Binding: confidentiality, exclusivity, non-compete clauses (if any), and the allocation of expenses. Breaching these clauses does have legal consequences.

It's very important to check which clauses have been marked as binding before signing. In deals of a certain size, specific legal advice for this stage is always recommended.

In practice, even though most of the LOI isn't legally binding, breaking it unilaterally without good reason usually has serious reputational consequences in a market as small and connected as Spanish M&A.

Most common mistakes when negotiating an LOI

These are the mistakes that hurt the seller (or the buyer) most at this stage:

1. Signing an LOI that's too vague: without a price or structure, the deal is left at the mercy of due diligence. The seller loses negotiating power.
2. Accepting exclusivity with no conditions: committing not to negotiate with anyone else for 90 days with no assurance of progress is risky. It's best to tie exclusivity to specific milestones.
3. Not clearly defining the “post-due diligence price adjustment”: if the LOI says the price will be adjusted “based on the due diligence findings,” the buyer can significantly lower the offer at the end. It's better to set clear criteria.
4. Forgetting the non-compete clause: especially important if the seller remains active in the industry. Define what they can and can't do for a period after closing.
5. Not reviewing the binding clauses: signing without reading the confidentiality and exclusivity clauses in detail can lead to real legal consequences.
6. Negotiating without an advisor: the LOI looks like a simple document, but it shapes the entire deal that follows. An experienced advisor spots trap clauses and improves the terms.

Frequently asked questions about the LOI

How long does it take to sign an LOI?

From first contact to signing an LOI usually takes 4 to 8 weeks, depending on the buyer's interest, how readily the seller can provide information, and the complexity of the deal. In competitive processes with several buyers, timelines can be shorter.

Who prepares the LOI?

It's usually prepared by the buyer, since they're the one making the offer. They typically rely on their legal counsel and their M&A advisor. The seller (with their own advisor) reviews it, proposes changes, and negotiates the terms before signing.

Can an LOI be changed after it's signed?

Yes, but it requires the agreement of both parties. Typically, the LOI is signed with general terms and some details are adjusted during due diligence. If the findings are material, the price or structure can be renegotiated, but always by mutual agreement.

What happens if one of the parties breaches the LOI?

It depends on which clause is breached. If the binding clauses (confidentiality, exclusivity, expenses) are broken, there can be legal and financial consequences. If the non-binding ones (price, structure) are broken, there's no legal penalty, but there is reputational damage and potentially lost time and money.