Letter of Intent (LOI): Everything You Need to Know Before Selling Your Business

What exactly is a Letter of Intent?

If you're in the process of selling your business, sooner or later you'll receive a document that can change the entire course of the transaction: the Letter of Intent (LOI).

It's not a purchase agreement. Nor is it a simple declaration of good intentions. It's the document where a buyer puts on the table the conditions under which they're willing to acquire your business. And here's the key point: how you negotiate this document will affect the final price more than any other phase of the process.

A LOI typically runs between 3 and 15 pages and establishes the framework for the transaction: proposed price, payment structure, timelines, exclusivity, and conditions. Once signed, the due diligence phase begins, and your negotiating power diminishes considerably.

What should a well-drafted LOI include?

An incomplete LOI is a ticking time bomb. These are the elements that cannot be missing:

Price and payment structure. A number isn't enough. Is it cash at closing? Is there a deferred portion? Does it include an earnout linked to future results? A €5 million offer with 40% in earnouts has a very different value from a €4.5 million all-cash deal.

What exactly is being purchased. Is it a share purchase or an asset purchase? What liabilities does the buyer assume? What falls outside the transaction? Every detail left undefined here becomes a later negotiation from a weaker position.

Working capital. One of the points that generates the most conflict. The LOI must define how working capital will be calculated and what adjustments will apply at closing. Ignoring this can cost you hundreds of thousands of euros.

Due diligence scope and timeline. If you don't define what the buyer will review and for how long, you're giving them carte blanche to extend the process and look for reasons to renegotiate the price.

Exclusivity period. During this time, you cannot negotiate with other buyers. It's the buyer's most powerful weapon. We'll discuss this in detail later.

Confidentiality, non-compete, and closing conditions. Clauses that protect both parties and establish what must happen for the transaction to materialise.

Which parts of the LOI are binding and which aren't?

This is probably the most confusing question, and rightly so. The short answer: most of the LOI is non-binding, but some clauses are enforceable and can take you to court.

Typically NON-BINDING clauses (may change during due diligence):

• Purchase price
• Transaction structure
• Representations and warranties
• Closing conditions
• Employee arrangements

Typically BINDING clauses (legally enforceable):

• Exclusivity: you cannot talk to other buyers
• Confidentiality: both parties must protect information
• Non-solicitation: the buyer cannot hire your employees during the process
• Expenses: each party bears its own costs
• Governing law and dispute resolution

A fact few sellers know: courts have declared LOIs labelled as "non-binding" to be binding when the language was ambiguous or the parties' behaviour suggested a real commitment. This is why it's essential that each clause expressly states whether it is binding or not.

How long should the exclusivity period be?

The exclusivity period is the most delicate moment for the seller. Once you sign it, your business is off the market. You cannot receive other offers or create competition among buyers. Your negotiating power drops dramatically.

Buyers typically request between 60 and 120 days. Data from 2025 shows these periods have lengthened significantly since 2021, clearly disadvantaging sellers.

Our recommendation: negotiate a period of 30 to 45 days. That's enough time for orderly due diligence on an SME. If the buyer needs more, they should justify it with concrete milestones. And always include an automatic termination clause if deadlines aren't met.

Why do deals fail after signing the LOI?

Signing a LOI doesn't guarantee closing. According to European market data from 2025, approximately 32% of M&A transactions don't reach completion. The main reasons have shifted significantly in recent years:

Non-financial due diligence findings (25.3%). Legal, operational, or commercial problems the buyer discovers during in-depth review. This cause has surged and is now the leading reason for deal failure.

EBITDA and quality of earnings discrepancies (21.3%). The buyer conducts their own financial analysis and concludes that reported EBITDA is lower than presented. This cause has doubled compared to 2023.

Financing issues (10.7%). The buyer cannot secure necessary financing. Interestingly, this cause has halved since 2023.

The conclusion is clear: pre-market preparation matters more than ever. Business owners who organise their finances, legal documentation, and operational processes before receiving a LOI have a much higher probability of closing the deal.

LOI, Term Sheet, or MOU? Are they the same?

Not exactly, though they're sometimes used interchangeably. The differences matter:

The LOI (Letter of Intent) is the most common format in SME acquisitions. It's a narrative, detailed document of 3 to 15 pages covering all aspects of the transaction. It almost always includes an exclusivity clause.

The Term Sheet is more common in venture capital or private equity transactions. It's more schematic, with bullet points and tables rather than paragraphs. It tends to be shorter and focused on economic terms.

The MOU (Memorandum of Understanding) is typically used in strategic alliances, joint ventures, or agreements between public entities. It's less common in direct business sales.

If you're selling your SME, you'll most likely receive a LOI. It's the market standard.

What are the most serious mistakes when negotiating a LOI?

After years of supporting M&A transactions, these are the mistakes that cost sellers the most money:

Negotiating without professional advice. This is mistake number one. The LOI seems like a simple document, but every sentence has economic and legal implications. An experienced M&A advisor can spot traps that a business owner would never see.

Obsessing over the headline price. A smart buyer knows they can offer a high price in the LOI and then reduce it during due diligence. What matters are the conditions: payment structure, working capital adjustments, earnouts, escrow, and indemnification clauses.

Accepting excessively long exclusivity periods. Every day of exclusivity is a day you cannot receive other offers. The longer it is, the more power the buyer has to renegotiate.

Not defining the scope of due diligence. If you don't establish what the buyer can review and within what timeframe, you give them the perfect tool to extend the process indefinitely.

Signing in haste. Pressure to close quickly is the buyer's best ally. Take the time needed to review every clause. Data shows that sellers who negotiate more at the LOI stage achieve better final outcomes.

When does the LOI appear in the sale process?

The LOI isn't the first step nor the last. It sits at a very specific moment in the process:

1. Preparation (1-3 months): valuation, sales memorandum, identification of potential buyers.
2. Marketing (1-2 months): contacting buyers, signing NDAs, sharing initial information.
3. Indications of interest (2-4 weeks): buyers express preliminary interest with a value range.
4. Management meetings (2-4 weeks): shortlisted buyers meet the team and visit facilities.
5. LOI submission and negotiation (1-2 weeks): serious buyers submit their formal offers. This is where we are.
6. Due diligence (30-60 days): thorough review under exclusivity.
7. Purchase agreement (15-30 days): drafting and negotiating the definitive agreement.
8. Signing and closing (1-30 days): final execution of the transaction.

From LOI signing to closing, it typically takes between 45 and 90 days for SME transactions, though complex deals may require more time.

One final piece of advice

Spain's M&A market grew by 63% in deal value during 2025, and projections for 2026 maintain this upward trend. There are more active buyers than ever, but they're also more sophisticated.

If you're considering selling your business, the LOI will be the document that determines whether you get fair value or leave money on the table. Don't underestimate it, don't sign it without advice, and remember: your greatest negotiating power exists before you sign it, not after.