Letter of Intent: When You Should Sign It

A letter of intent (LoI) is a largely non binding document that records the key parameters of a planned company sale: price or price range, payment structure, conditions and timeline. What usually does bind you are its exclusivity and confidentiality clauses, and everything else you fix here becomes the reference point for the final contract.

At some point on the road to a handover this document lands on the table, and it sounds more harmless than it is. Many owners take it too lightly, because it is considered non binding, or too seriously, because a piece of paper suddenly makes the sale feel real. Both reactions mislead: anyone who understands what is settled here, and what is not, negotiates from a stronger position from then on.

What a letter of intent is and what it is not

A letter of intent (also called a term sheet or declaration of intent) records the essential parameters of a planned transaction: the price or a price range, the payment structure, an exclusivity period, the conditions, and the timeline. It appears wherever a real negotiation takes place, most prominently in a third-party sale or a management buy-out, two of the routes compared in third-party sale, family transfer or MBO.

The word non binding tempts you to underestimate the document. Quite the opposite. The letter of intent sets the frame of reference for every later round of negotiation. What you commit to here becomes the starting point from which the talks continue, and experience shows it is hard to walk back something once it has been fixed. A figure named too early, a deadline granted too generously, a condition worded too loosely: all of it carries on working long after the ink is dry.

Under Swiss law, whether an individual clause binds the parties is a question of general contract law under the Code of Obligations; exclusivity and confidentiality provisions are typically drafted to remain enforceable even where the rest of the document is not. This describes common practice, not legal advice for your case.

Non binding does not mean meaningless. The letter of intent sets the tone in which everything that follows is discussed.

What the letter of intent should settle

Four areas deserve your full attention before you sign.

• Valuation basis. Pin down what the price refers to: enterprise value or equity value, on which EBIT basis the figure is calculated, and whether an earn-out is agreed that ties part of the price to future performance. Terms left open here become expensive later.
• Exclusivity. This governs how long the buy side may examine the company exclusively, commonly thirty, sixty, or ninety days. That period is not free: it ties up day to day management, generates advisory costs and committed attention, while you still have to keep running the business.
• Conditions. Note what must be met for the sale to close: a positive due diligence, confirmed financing on the buy side, and any official or regulatory approvals.
• Confidentiality. Clarify how the information from due diligence will be handled if the transaction does not go ahead. You are opening your books to a counterparty that may afterwards buy nothing yet know everything.

These four points look technical. In reality they decide whether the later contract becomes a continuation of your intentions or a laborious correction of them.

Common mistakes with the letter of intent

Most difficulties arise not from bad faith but from an imbalance of experience. Three patterns recur again and again.

Signing too quickly or without your own advisers. The buy side knows this document inside out, often having guided dozens of such transactions. The selling owner frequently reads a letter of intent for the first time in their life. You do not close that gap with a good feeling, but with your own advisers who read the document as equals before you put your name to it.

Underestimating exclusivity. During the exclusivity period, parallel talks with other interested parties breach the agreement. The period buys the buy side time and takes it from you: in this phase you lose the ability to create competition, and you carry the risk that no close materialises at the end of it and you start over. The longer the period, the greater this leverage on the other side.

Accepting earn-out structures without understanding the mechanics. An earn-out can make sense, yet it pushes part of the price into the future and makes it conditional. Anyone who has not fully grasped the trigger criteria and the calculation basis is signing a figure that may later turn out to be markedly smaller. Understand exactly what triggers the earn-out, who controls the relevant metrics, and what happens if the buy side runs the company differently after the handover.

What a head start is worth

The common denominator of these mistakes is not knowing your own situation. Anyone who enters the letter of intent talks knowing precisely where their company stands, which bottlenecks a buyer will mark down, and which parameters are realistic, negotiates from knowledge rather than from hope. That state of readiness before the first negotiations is a structural advantage, not a detail.

If you would like to take stock in this way before a letter of intent reaches your table, our succession diagnosis places your company along ten dimensions in a structured session and gives you a prioritised plan for the next 90 days. You can arrange it on our booking page.