LOI and SPA in a Business Sale: A Step-by-Step Guide

The Letter of Intent (LOI) and the Share Purchase Agreement (SPA) are the two legal documents that underpin every M&A transaction. Yet most business owners selling for the first time reach the signing table without fully understanding what they are giving away in each clause. This step-by-step guide explains both documents, what they contain, what is negotiable, and where the most important points of value are won or lost.

What is the Letter of Intent (LOI) in a business sale

The Letter of Intent — also known as a term sheet or Memorandum of Understanding (MOU) — is the non-binding document the buyer presents to the seller after an initial review of the company. It sets out the principal terms of the transaction before the due diligence process begins.

Its function is twofold: it formalises the buyer's interest and serves as a roadmap for negotiating the SPA. In Spain, the LOI is not legally binding on its economic terms, but exclusivity, confidentiality and break-up fee clauses typically are.

What a well-drafted LOI should include

• Indicative price and structure: enterprise value, equity value, payment form (cash, earn-out, buyer shares) and proposed timeline.
• Main conditions precedent: satisfactory due diligence, confirmed financing, regulatory clearances.
• Scope of the transaction: which assets and liabilities are included; whether it is a share deal or asset deal.
• Exclusivity: the seller agrees not to negotiate with third parties for a defined period (typically 30–60 days). This is the most important clause for the buyer.
• Reinforced confidentiality: extends obligations to the terms of the LOI itself.
• Validity and expiry conditions: the period during which the LOI remains in force.

Warning: signing exclusivity before the final price is firmly established is the most costly mistake a seller can make at this stage. Once inside exclusivity, the buyer controls the timeline and can use due diligence findings to renegotiate downward.

What is the SPA (Share Purchase Agreement) in a business sale

The Share Purchase Agreement — or Asset Purchase Agreement (APA) if assets rather than shares are sold — is the definitive, binding contract that sets out all terms of the transaction and transfers ownership. It is the document that closes the deal.

The SPA is typically drafted by the buyer's counsel. The seller reviews and negotiates it. This is important: the starting draft always favours the buyer. The seller needs an M&A-specialist lawyer to rebalance it.

Structure and key clauses of the SPA

1. Price, adjustments and payment mechanism: the final price is determined by a closing adjustment based on actual net debt and working capital at the closing date. This mechanism can move the price by hundreds of thousands of euros relative to the enterprise value agreed in the LOI.
2. Representations and warranties: the seller warrants that financial, tax, employment and corporate information provided is true and complete. If any representation proves false, the buyer may claim damages.
3. Indemnities: the seller indemnifies the buyer for specific known contingencies or for breaches of warranties.
4. Limitations of liability: cap (maximum liability amount, typically 20%–100% of price), basket (minimum claim threshold) and limitation period (typically 18–36 months for general warranties, longer for tax and employment matters).
5. Conditions precedent to closing: what must occur before the deal closes — shareholder approval, regulatory clearances, absence of a material adverse change.
6. Non-compete and non-solicit covenants: the seller agrees not to compete in the same sector for a defined period (1–3 years) and not to poach key employees. Common and generally enforceable in Spain if reasonable in scope and duration.
7. Earn-out (if applicable): deferred price contingent on future results. Requires very detailed drafting to avoid subsequent disputes over the calculation base.
8. Escrow accounts: a portion of the price (typically 10–15%) is held in a blocked account during the warranty period to cover potential claims.

Step by step: from LOI to SPA closing

Step 1: Receive and negotiate the LOI

When you receive an LOI, the first rule is: do not sign anything until you have reviewed every term with your advisor. Critical points to check before signing exclusivity:

• Is the price enterprise value or equity value? How is net debt defined?
• How long is the exclusivity period? Negotiate to reduce it or add exit conditions.
• What are the conditions precedent? Are they reasonable or excessively subjective?

Step 2: Due diligence

Once the LOI is signed, the buyer conducts financial, tax, legal and operational due diligence. The seller provides information through a virtual data room. The more organised and complete the documentation, the lower the risk of price adjustments from "findings". Due diligence typically takes 4–8 weeks.

Step 3: SPA negotiation

After due diligence, SPA negotiation begins. This typically takes 3–10 weeks depending on complexity. The main friction points are:

• The cap and basket on warranties.
• The price adjustment mechanism (locked box vs. completion accounts).
• Specific contingencies identified during due diligence.
• The earn-out period and reference earnings, if applicable.

Step 4: Signing and closing

In many deals, signing and closing are simultaneous (sign & close). In deals requiring regulatory clearances, weeks or months may pass between signing and closing. During this period, the seller continues managing the business with restrictions on extraordinary decisions.

Key differences between LOI and SPA

• Legal binding: the LOI is non-binding on economic terms; the SPA is fully binding.
• Timing: the LOI is signed before due diligence; the SPA after.
• Detail: the LOI covers headline terms; the SPA governs every aspect of the transaction.
• Drafting party: the LOI is proposed by the buyer; the SPA is also drafted by the buyer's counsel.

Common seller mistakes in LOI and SPA negotiations

• Signing exclusivity without advisors: once inside, the buyer controls the timeline and can use it to their advantage.
• Not reviewing the price adjustment mechanism: the LOI price and the amount received in your account are different things. Working capital and net debt adjustments can be material.
• Accepting an excessively high cap: a 100% cap means you could, in the worst case, return everything you received. Negotiate lower limits and reasonable limitation periods.
• Poorly defining the earn-out: an ill-defined earn-out almost inevitably generates disputes. Every lever that affects the reference result must be regulated.
• Using a generalist lawyer: M&A-specific clauses require M&A-specific expertise. The difference in SPA negotiation outcomes more than justifies the specialist fee.

Frequently asked questions about LOI and SPA in business sales

Does signing the LOI commit me to selling?

Generally no. The LOI is non-binding on its economic terms. However, the exclusivity and confidentiality clauses are binding. Breaking exclusivity without justified cause can expose you to damage claims. Always review the LOI with a lawyer before signing.

How long does it take from LOI to deal closing?

In straightforward deals without regulatory hurdles, the process from LOI signing to closing takes 3–6 months. With complex due diligence or required regulatory clearances, it can extend to 9–12 months.

What is the locked box mechanism?

An alternative to a closing price adjustment. A reference balance sheet is fixed at a date before signing (the locked box date), and the price is not subsequently adjusted except for leakages — payments to the seller between that date and closing that were not pre-authorised. It favours the seller because it provides certainty on the final price.

How much can the price be reduced between LOI and closing?

It depends on due diligence findings and the price adjustment mechanism. In clean deals, the adjustment is minor. Where tax, employment or customer contingencies are identified, price chips can reduce the price by 5–15%. Solid pre-sale preparation minimises this risk.

Is a share deal or asset deal better?

It depends on perspective. For the seller, a share deal is typically more favourable from a Spanish tax perspective (participation exemption may apply). For the buyer, an asset deal provides greater control over which liabilities are assumed. Most Spanish M&A transactions use a share deal structure, with exceptions depending on sector risk profile.