EVERYTHING YOU NEED TO KNOW ABOUT THE LETTER OF INTENT (LOI) BEFORE BUYING A BUSINESS

You are about to acquire a business. Before you even start talking numbers, one document will shape the entire course of the transaction: the Letter of Intent (LOI).

Long reserved for large, complex deals, the LOI is now an almost standard practice in M&A transactions, both in France and in Luxembourg. But what exactly is an LOI? Why does it matter so much? And what are the risks if it's poorly drafted?

A signed letter of intent on a desk with a pen

What is a LOI?

An LOI is an optional, pre-contractual document, generally non-binding, drafted by the buyer. It sets out the terms under which the buyer intends to acquire the target company. Although optional, the letter of intent can prove essential for formalizing the parties' willingness to enter into discussions.

When it exists, the LOI comes before the signing of the sale agreement, alongside the confidentiality agreement, and is meant to set the tone for the future transaction that is, to lay the groundwork, align expectations, and allow both parties to move toward a final legal agreement.

Note: Because of its non-binding nature, the LOI differs from a firm, binding offer. Unlike a binding offer, it does not create an obligation to complete the sale. A binding offer, by contrast, is precise and complete enough that the contract is formed upon the seller's acceptance alone, and reflects a firm intent to be contractually bound.

Why the LOI Matters in Buying a Business

Although optional and non-binding, the LOI is a powerful tool when carefully drafted. It helps to:

• Set the pace of the transaction and influence its chances of success

• Identify deal breakers early, before too much time and resources are invested

• Reduce the risk of the buyer withdrawing during negotiations

• Speed up the drafting of the final sale agreement

The LOI forces the buyer to take a position on key points of the transaction, notably the representations and warranties (threshold, counter-guarantee, cap, etc.).

What are the risks of a poorly drafted LOI?

This is where many buyers underestimate what's at stake.

Even when presented as "non-binding," an LOI almost always contains clauses that are legally binding: confidentiality clauses, exclusivity clauses, and clauses covering penalties for wrongful termination of negotiations.

What's more, simply stating that the document is non-binding isn't enough to rule out all legal effect. In the event of a dispute, a judge is not bound by the labels the parties have chosen. The judge will look for the parties' true intent through the wording actually used in the document.

An LOI that is too detailed i.e. including a precise price and no condition precedent for the acquisition, could be reclassified by a judge as a binding offer, with all the legal consequences that entails.

This is why drafting an LOI calls for care and precision.

Checklist: 5 Golden Rules for a Solid LOI

Before signing or sending your Letter of Intent, check the following:

• Do not overload the document: the LOI sets the framework, not the final terms

• Expressly include the conditions precedent to completing the transaction (financing approval, due diligence results, etc.)

• Clearly state that the document creates no obligation to buy or sell

• Identify the binding clauses and distinguish them from the rest of the document

• Include a release clause in case the transaction does not go through

  
  

Conclusion

When well drafted, the Letter of Intent is far more than a formality: it is the first structuring act of your acquisition. It protects your interests, clarifies both parties' intentions, and lays the foundation for a smooth transaction.

When poorly drafted, it can expose you to significant legal risks or even jeopardize the entire negotiation.

→ Get support from an M&A lawyer as soon as you start drafting your LOI. It's an investment well worth making.

Are you considering acquiring a business in France or Luxembourg? Feel free to contact us for an initial conversation.