LOI vs SPA: Key Differences Between the Letter of Intent and the Share Purchase Agreement

In any business acquisition, the Letter of Intent (LOI) and the Share Purchase Agreement (SPA) are the two pivotal documents around which the entire deal is structured. Yet many business owners and first-time acquirers sit across the negotiating table without a clear understanding of what each document actually commits them to, when it should be signed, and what happens when things go wrong. This side-by-side comparison of the LOI and the SPA is designed to give you that clarity before you put pen to paper.

What Is a Letter of Intent (LOI) in a Business Sale?

The LOI is the first formal document exchanged between buyer and seller after initial discussions. Its purpose is to establish the framework for negotiation — indicative price, deal structure, exclusivity, and timelines — before either party commits significant time and money to due diligence.

You may encounter the LOI under other names: Term Sheet, Heads of Terms, or Memorandum of Understanding (MOU). The differences are largely semantic: a Term Sheet tends to be shorter and more commercial; a Heads of Terms document is common in UK M&A practice; an MOU can include more detailed commitments. The legal nature of all three is broadly similar.

What Does a Typical LOI Contain?

• Indicative price and valuation methodology: usually expressed as a range or an EBITDA multiple, subject to confirmation through due diligence.
• Deal structure: share deal (purchase of company shares) or asset deal (purchase of specific assets), each with different tax implications for both parties.
• Exclusivity period: the buyer needs time to conduct due diligence without the seller engaging other bidders. The standard window is 45 to 90 days.
• Target date for SPA signing: an estimated date for completing the definitive agreement.
• Key conditions precedent: financing approval, regulatory clearances, or key shareholder consent that may condition closing.
• Confidentiality: reinforces any existing NDA and applies to the LOI negotiation itself.
• Cost allocation: who bears advisory and legal costs if the deal does not proceed to completion.

Which LOI Clauses Are Legally Binding?

This is the most frequently misunderstood point. As a rule, the LOI is not binding as a whole: neither the buyer is obliged to acquire, nor the seller to sell. However, certain provisions are legally enforceable:

• Confidentiality: a breach can give rise to a damages claim.
• Exclusivity: if the seller approaches another buyer during the agreed period, the buyer may recover its due diligence costs.
• Break fee: where included, a buyer walking away without cause must pay a fixed sum to the seller (or vice versa), typically 1-3% of the indicative price.
• Cost allocation: the clause governing who bears costs in the event of a breakdown is binding.

Everything else — price, structure, warranties — remains fully negotiable until the SPA is signed. Business owners who forget this may find themselves facing a buyer who chips the price significantly after due diligence, with the LOI offering no protection at all.

What Is a Share Purchase Agreement (SPA) in M&A?

The SPA is the definitive, legally binding document that gives effect to the business acquisition. It is signed after due diligence, once both parties have agreed every commercial and legal term of the transaction. Unlike the LOI, the SPA creates full legal obligations: the buyer must pay and the seller must transfer the shares or assets on the agreed terms.

For mid-market SME transactions in the one-to-ten-million-euro range, an SPA typically runs to between 40 and 100 pages. Larger or more complex deals regularly exceed 200 pages. Every clause addresses a specific risk identified during due diligence.

Typical Structure of a Share Purchase Agreement

1. Definitions: agreed terminology to avoid ambiguity — target company, shares, completion date, net financial debt, normalised working capital, and so on.
2. Sale and purchase of shares: the formal transfer of shares and the base purchase price.
3. Price adjustment mechanisms: either a locked box (price fixed at a historical reference date) or completion accounts (price adjusted to actual closing figures), with adjustments for cash, debt, and working capital.
4. Representations and warranties: the seller's detailed statements about the state of the business — legal compliance, tax position, employment, environmental matters, and key contracts.
5. Indemnities: the economic consequences of a warranty breach, typically subject to agreed caps and baskets.
6. Conditions precedent: regulatory approvals, third-party consents, and the absence of a material adverse change.
7. Completion: the simultaneous actions on signing day — payment, share transfer, board resignations, and new appointments.
8. Post-completion obligations: non-compete covenants, any deferred earn-out payments, and transitional information obligations.
9. Governing law and dispute resolution: the jurisdiction or arbitration forum for any dispute.

The SPA Clauses That Determine the Real Purchase Price

The headline price announced in a deal rarely equals what the seller actually receives in their bank account. These SPA clauses are what truly decide it:

• Net financial debt: all bank debt is deducted from the enterprise value to arrive at the equity value — the actual cash the seller pockets.
• Working capital adjustment: if working capital at completion falls short of the agreed normalised level, the price is reduced pound for pound.
• Locked box vs completion accounts: a locked box gives the seller price certainty (risk of leakage sits with the buyer from the reference date); completion accounts protect the buyer from cash leakage before closing.
• Earn-out: a portion of the price contingent on future performance targets, which can represent up to 30% of total consideration in businesses with uncertain revenue.
• Escrow or retention: 5 to 15% of the price is typically held in a third-party account for 12 to 24 months to cover potential warranty claims.

LOI vs SPA: A Complete Side-by-Side Comparison for Business Sales

• Stage in the process: The LOI is signed at the start, before due diligence. The SPA is signed at the end, after due diligence and final negotiation.
• Legal status: The LOI is largely non-binding (except for exclusivity, confidentiality, and any break fee). The SPA is fully binding on both parties.
• Length: The LOI runs to 3-10 pages. The SPA ranges from 40 to 200+ pages.
• Price: In the LOI, the price is indicative or a range. In the SPA, the price is final, subject only to defined adjustment mechanisms.
• Who negotiates it: The LOI can be negotiated by the principals with M&A advisory support. The SPA requires specialist M&A lawyers on both sides.
• Legal cost: LOI negotiation carries relatively modest advisory fees. SPA legal fees typically run from €20,000 to €100,000 or more depending on complexity.
• Negotiation timeframe: An LOI is typically agreed in one to three weeks. The SPA takes four to twelve weeks after due diligence.
• Key risk: On the LOI, the main risk is wasted time and money if the deal collapses. On the SPA, the risk is warranty claims in the two to four years following completion.

How LOI and SPA Fit Into the M&A Timeline

1. Initial contact and NDA: parties meet and sign a non-disclosure agreement.
2. Preliminary information exchange: the seller shares the Information Memorandum; the buyer asks initial questions.
3. LOI signing: the buyer submits an indicative offer; if accepted, both parties sign the LOI and exclusivity begins.
4. Due diligence: the buyer conducts financial, legal, tax, employment, and operational analysis. Typical duration: four to eight weeks.
5. SPA negotiation: legal teams negotiate the definitive agreement. Typical duration: four to twelve weeks.
6. Signing: both parties sign the SPA and any ancillary documents.
7. Completion/Closing: may be simultaneous with signing, or deferred if conditions precedent remain outstanding. This is when money and shares are exchanged.

From first contact to completion, mid-market SME transactions in the one-to-twenty-million-euro range typically take between four and nine months.

Common Mistakes in Negotiating an LOI or SPA

Frequent LOI mistakes

• Signing without clear exclusivity protection: a buyer without a break fee can walk away at no cost, leaving the seller exposed after months of process and with a company that has been on the market.
• Failing to define the scope of due diligence: without defined scope, the buyer can extend the process indefinitely.
• Accepting an unrealistic indicative price: the LOI is not binding on price, but it anchors expectations psychologically and makes upward revision very difficult.
• Omitting the cost allocation clause: if due diligence uncovers problems and the deal collapses, who pays for the advisers? Without an express clause, each side absorbs its own costs — which can reach €50,000-80,000 for the seller.

Frequent SPA mistakes

• Inadequate warranty caps and baskets: without properly negotiated limitations, the seller remains exposed to uncapped claims for years after completion.
• Overlooking working capital mechanisms: a business with €500,000 of surplus cash can see its price reduced by the same amount if the working capital peg is not properly negotiated.
• Earn-outs tied to buyer discretion: an earn-out contingent on targets the buyer can influence through post-completion management decisions is a guaranteed source of future litigation.
• Not exploring Warranty and Indemnity insurance: for transactions above €3-5 million, W&I insurance transfers warranty risk to an insurer, facilitating closing and allowing the seller to receive a clean exit price.

Frequently Asked Questions About LOI and SPA in Business Acquisitions

Can I walk away after signing an LOI without financial consequences?

It depends entirely on what you have signed. If the LOI contains a break fee or cost allocation clause, walking away will carry a financial cost. If it does not, you can technically withdraw — but you will have damaged your market reputation and may face a claim for pre-contractual liability if the other side can demonstrate they suffered a loss as a result of your conduct.

Can the SPA change the terms agreed in the LOI?

Yes, and this happens regularly. Because the LOI is non-binding on price and structure, the SPA can depart from the indicative terms. After due diligence, buyers frequently reduce the price (price chipping) or introduce additional warranty protection. Sellers should anticipate this dynamic and negotiate the LOI with that risk in mind.

How long do SPA warranties last?

In SME transactions, general warranties typically run for 18 to 36 months from completion. Tax and employment warranties often extend to the statutory limitation period — in Spain, four years for tax matters. Title warranties (confirming clean ownership of the shares) are usually unlimited in time.

Who drafts the SPA — the buyer or the seller?

In most M&A transactions, the buyer takes the lead on drafting the SPA (buyer-drafted). This gives the buyer a tactical advantage, as the starting point of negotiations is their own position. In competitive processes with multiple bidders, the seller can reverse this dynamic by presenting their own SPA draft — a move that significantly strengthens their negotiating position.

What is the difference between signing and completion in an SPA?

Signing is when both parties execute the SPA and become legally bound. Completion (also called closing) is when the obligations under the SPA are performed: the buyer pays and the seller transfers the shares. In many deals, signing and completion happen on the same day. Where conditions precedent remain outstanding — regulatory approval, key customer consent — they may be separated by weeks or even months.