The Letter of Intent and the Share Purchase Agreement are the two legal pillars of any M&A deal. Understanding their differences, key clauses and common pitfalls can be the difference between closing your sale or losing it.
LOI and SPA: the two documents at the heart of every business sale
When a business owner decides to sell their company, the deal doesn't begin with a handshake or end with a wire transfer. Between those two moments, a structured process unfolds in which two documents carry almost all of the legal and strategic weight: the Letter of Intent (LOI) and the Share Purchase Agreement (SPA). Understanding the difference between a LOI and an SPA in a business sale is not a technicality reserved for lawyers — it is a genuine competitive advantage for any seller.
In this article we compare both documents in depth: what each one governs, when it appears in the process, which clauses are most sensitive, and the mistakes that most often cost money or cause deals to collapse.
What is a LOI and what role does it play in the M&A process?
The LOI — also called a Memorandum of Understanding (MOU) — is a document the buyer delivers to the seller to formalise their interest and propose the main economic and structural terms of the deal. It typically appears after initial meetings and a review of the Information Memorandum, and before deep due diligence begins.
Typical elements of a LOI
- Indicative valuation: a price or price range, subject to confirmation following due diligence.
- Deal structure: share purchase, asset purchase, merger, etc.
- Price mechanism: fixed price, locked box, cash-and-debt adjustment, or earn-out.
- Conditions precedent: regulatory approvals, financing, due diligence outcomes.
- Exclusivity: a period during which the seller agrees not to negotiate with third parties.
- Confidentiality: a binding clause that usually reinforces a prior NDA.
- Indicative timeline: key milestones through to closing.
The LOI is, for the most part, non-binding. The price can change, the structure can shift, and the buyer can walk away if due diligence reveals negative surprises. However, the exclusivity and confidentiality clauses are binding and carry legal consequences if breached.
What is the SPA and why is it the definitive document?
The Share Purchase Agreement is the document that closes the deal. Unlike the LOI, the SPA is fully binding from the moment of signing and governs every aspect of the transaction with precision.
Its drafting is the result of weeks or months of negotiation between the legal teams of both parties, and it can run from 80 to over 300 pages in complex transactions.
Core sections of the SPA
- Price and adjustment mechanism: sets the final price and any post-closing adjustment.
- Representations and Warranties (R&W): the seller declares that the business is as presented — financially, legally, fiscally and operationally.
- Indemnities: mechanisms allowing the buyer to recover value if representations prove incorrect.
- Escrow: a portion of the price may be held back for one or more years as security against claims.
- Non-compete: the seller commits not to compete for a defined period.
- Conditions precedent: what must occur between signing and closing.
- Post-closing obligations: seller commitments to facilitate transition.
LOI vs SPA: a direct comparison
| Criterion | LOI | SPA |
|---|---|---|
| Timing | After initial negotiations | After due diligence |
| Legal binding force | Partially binding | Fully binding |
| Price | Indicative | Definitive |
| Typical length | 5–20 pages | 80–300 pages |
| Negotiation speed | Fast (days or weeks) | Extended (weeks or months) |
| Main risk for seller | Exclusivity and loss of alternatives | Overly broad warranties and indemnities |
The most dangerous clauses for the seller
In the LOI: the exclusivity period
An excessively long exclusivity period (more than 60–90 days for SMEs) can leave the seller with no options if the buyer walks away. It is essential to negotiate a reasonable duration, clear termination triggers, and ideally a break-up fee if the buyer exits without cause.
In the SPA: representations and warranties
R&W is the most hotly contested battleground in the SPA. Sellers want narrowly scoped declarations; buyers want them as broad as possible. The most critical points are:
- Time limits: how long can the buyer bring a claim? The standard is 18–36 months but is negotiable.
- Financial caps: the basket (minimum threshold to trigger a claim) and the cap (maximum seller liability).
- Materiality thresholds: minor inaccuracies below a defined threshold do not trigger claims.
W&I Insurance (Warranty & Indemnity Insurance) is increasingly common in the Spanish market, transferring warranty risk to an insurer, reducing escrow, and easing negotiations between the parties.
What happens between the LOI and the SPA
Between signing the LOI and signing the SPA, at least three parallel processes unfold that determine whether the deal closes and on what terms:
- Due diligence: the buyer audits the company — financial, legal, tax, labour and operational. Findings drive price adjustments and the warranties demanded in the SPA.
- SPA negotiation: legal teams draft and negotiate the contract. Starting positions are far apart and negotiation can be intense.
- Buyer financing: if the deal is debt-funded, the buyer must secure the loan before closing. Lenders may impose conditions on the SPA structure.
Common mistakes that cost money or kill the deal
- Signing a LOI without legal advice: some sellers treat the LOI as an informal pre-agreement. The exclusivity clause can lock you out for months.
- Not preparing a data room before the LOI: if due diligence uncovers problems the seller knew about, the buyer will demand a price reduction or additional warranties.
- Underestimating escrow: retained funds are not temporarily blocked money — they can be lost if claims arise. Negotiating the amount and duration is critical.
- Overlooking the non-compete: overly broad clauses in geographic scope or duration can severely restrict the seller's future activity.
- Misalignment between LOI and SPA: when the economic structure in the LOI differs significantly from the SPA, it creates conflicts that can stall or kill the deal.
When do you need an M&A adviser versus just a lawyer?
The short answer: you always need both, but in different roles. The lawyer drafts and negotiates the legal documents. The M&A adviser (such as Fundenza) designs the deal strategy: which buyers to approach, how to present the company, when and how to negotiate price, and how to protect value from LOI to SPA closing.
The most common mistake is engaging the lawyer too late (after the buyer has already sent a LOI) or the M&A adviser too early without having the company prepared for sale. The ideal moment to involve both is before the buyer makes an offer, not after.
Frequently asked questions about LOI and SPA in business sales
Can I skip the LOI and go straight to the SPA?
Technically yes, but it is unusual in deals of any complexity. The LOI ensures both parties are aligned on the main points before incurring the costs of due diligence and SPA drafting.
What happens if the buyer withdraws after signing the LOI?
If the withdrawal is driven by legitimate due diligence findings, the buyer can generally walk away without consequences. If they exit without cause during the exclusivity period, pre-contractual liability may arise, though enforcing it in court is costly and slow. Negotiating a break-up fee in the LOI is therefore a meaningful protection.
How long does it take from LOI to SPA closing?
For SME transactions in Spain, the typical timeframe is 3 to 6 months. More complex deals, those involving multiple buyers or requiring regulatory approval, can extend to 12–18 months.
What is W&I Insurance and when does it make sense?
Warranty & Indemnity Insurance covers claims arising from incorrect warranties in the SPA. It makes sense from a certain deal size (generally above €5–10M) and allows parties to reduce escrow, ease closing and de-escalate warranty negotiations.
Are non-compete clauses in the SPA always enforceable in Spain?
To be enforceable, they must be reasonable in geographic scope (typically the market where the business operates), in activity (specific sector, not generic activity) and in duration (usually 2–4 years). Overly broad clauses may be declared void by Spanish courts.
