M&A: Letter of intent agreement

Marxman Advocaten has a team of specialists in the field of M&A, with Berthe Schellinger and Pieter Verloop dedicated to this practice every day! Because we like to share our knowledge, a blog on this topic appears on our website every fortnight. This week an article on letter of intent.

A business acquisition involves many different types of agreement. One such agreement is a letter of intent (also known as a ‘LOI’, ‘Declaration of Intent’ or ‘Term Sheet’).
Once the parties have reached an advanced stage in the negotiations regarding the acquisition, the time often comes when they decide to enter into a letter of intent. There are also parties who do not opt for a written letter of intent, but instead draw up a purchase agreement (or have one drawn up) straight away.

What is it now the advantage of a letter of intent and when do you conclude it or not?

Putting agreements made at an early stage in writing in outline form can have many advantages.

1. Agreements and intentions are put in writing at an early stage, so less discussion can arise later on about the wording of the agreements in the final agreement.
2. Buyer can formulate assumptions that are very important to buyer and on the other hand, seller obtains more certainty regarding the assumptions of the acquisition.
3. If parties did not agree on confidentiality at an earlier stage, a letter of intent can still provide for it.
4. The advantage for a seller is that by entering into a letter of intent, a seller can potentially be more quickly obliged to enter into a purchase agreement.
5. The advantage for a buyer may be that it can agree exclusivity in a letter of intent, in addition, (suspensive) conditions will often be included whereby the buyer has the option to still abandon the acquisition.

The disadvantage of a letter of intent for a buyer can be that it is considered binding and a buyer can no longer abandon the acquisition - at least not without owing compensation. Therefore, it is important to colour it correctly in legal terms, which can provide sufficient clarity for the seller but still leave possibilities for the buyer not to be able to proceed with the acquisition.

Do you have any questions about a letter of intent and how to draw one up in a legally sound manner?
Our specialists will be happy to help you!