Your business transfer intermediary contacts you to let you know that they’ve received a letter of intent, also known as an “LOI,” from a potential buyer. Is the deal done? Not quite yet!

Although fundamental to the transfer process, this letter of intent is not a definitive purchase agreement. It serves to document the intentions of your counterpart, whose ultimate goal is to close the transaction. Often compared to a sales agreement used in real estate, the letter of intent is, in fact, not entirely comparable. So, what should you be attentive to?

Letter of Intent: Binding or non-Binding?

In contractual matters, our legal system follows the principle of consensualism. This means that once an agreement is reached on the object of the sale and its price, the sale is considered complete. After the sales agreement is signed, only any potential suspensive conditions can prevent the transaction. However, in business transfers, the situation is somewhat different. Whereas a signed sales agreement marks the near end of the process in real estate, receiving a letter of intent marks the beginning of the relationship with the buyer. From this point onward, the buyer will attempt to learn more about the targeted company, which often suggests further negotiations down the line. In this sense, the buyer has a vested interest in emphasizing the non-binding nature of the “LOI” to avoid any ambiguity about its interpretation. Moreover, mentioning essential points that still need to be agreed upon is crucial to avoid considering these items as already settled. However, like a sales agreement, the letter of intent can include suspensive conditions, such as obtaining financing for the acquisition or conducting a due diligence audit to verify the accuracy of the information provided. As you can see, the “LOI” is not meant to produce the same effects as a sales agreement, and the way it’s written could influence things.

The price, but what price?

In real estate, unless in exceptional cases, the price stated in a sales agreement is fixed. In theory, it’s unlikely that the property will lose significant value before the signing of the final deed. On the other hand, in the context of a business transfer, the price offered at the letter of intent stage is based on a limited analysis of the company’s financials and information already provided by the seller. Given that several months may pass between receiving the letter of intent and the actual signing of the transfer agreement, one can conclude that setting a fixed and final price improves the clarity of the deal but also constitutes a risky bet on the stability of the target’s value, which, in practice, is always fluctuating. To protect against this risk, the buyer may use an earn-out or a price formula, see BestValue article on the offer price.

The champagne will have to wait

Now you know that a sales agreement and a letter of intent don’t produce the same effects. Stating a final price without emphasizing the non-binding nature of the “LOI” could lead to confusion and misinterpretation. Its reception is, in fact, an important step in your transfer process, but it does not signal the end. The benefit of being supported during its drafting or analysis is clear: it helps establish future negotiations calmly and turn the letter of intent into a transfer agreement… and then finally pop the champagne that’s been chilling since the start of the process!