Every deal is different and so no two letters of intent are the same. A letter of intent is a type of preliminary agreement that outlines the principles for further negotiations on the final acquisition contract. A letter of intent has many names. In addition to letter of intent, the following terms are also used for this preliminary agreement: term sheet, letter of intent, Memorandum of Understanding (MoA), Heads of Terms (HoT). Some of these preliminary agreements are already quite binding, others significantly less so. You cannot infer that from the name of this pre-agreement, but follows from its content.

Here are the 10 most common topics in term sheets, letters of intent, Memorandum of Understanding and letters of intent,
written by Ernest Loor, lawyer and specializing in corporate law.

1. Deal structure

Description of the quantity of shares (numbers) the buyer wishes to purchase in the company ("target") in the case of a target share transaction or a description of the assets to be purchased in the case of a target asset / liability - transaction and the purchase price the buyer wishes to pay for them.

2. Payment of the purchase price

Is the purchase price paid entirely in cash upon delivery of the shares or assets? Or is a portion of the purchase price to be paid retained and paid later, for example when certain objectives have been achieved (so-called "earn out"). Partial settlement of the purchase price against an outstanding debt is also possible, for example.

3. Deal security

Does the buyer still attach all kinds of suspensive / resolutory conditions to the continuation of the transaction? Think for example of (i) approval of the supervisory board, (ii) consent of the works council, (iii) covenanting due diligence, (iv) obtaining financing etc. etc. as resolutive conditions in favor of the buyer in order to be able to get out of the deal at a later stage of the negotiation process. The fewer resolutive / suspensive conditions included in the letter of intent, the more deal certainty parties will have.

4. Assumptions and assumptions

Is the letter of intent framed so that the buyer still bases his non-binding offer (non-binding proposal) on a variety of assumptions? For example: Our proposal is based on the following assumptions and premises: ....- the projections and forecasts about [ ] give a true picture.... etc. And what consequence does the buyer then attach to this if it subsequently turns out that he/she based his/her offer on incorrect assumptions? Discount on the purchase price? Break off negotiations?

5. Governance, Management and Control

What is the seller's role after the transaction? Does he/she remain associated with the company as a formal director and/or manager, and what management compensation does the buyer anticipate? Does seller have one or more veto rights for certain shareholder decisions if he/she remains associated with the company as a minority shareholder after the transaction?

6. Due diligence

Does the buyer still require a book examination (due diligence)? Often the letter of intent briefly describes the scope of the due diligence. Will an extensive or limited due diligence take place and which parts of the business will be scrutinized in particular? Sometimes only an outline financial due diligence takes place, sometimes the buyer also requires an extensive investigation, for example on certain environmental aspects of the company. Finally, the letter of intent also often regulates what consequences the buyer will attach to a non-convenient due diligence. The buyer then tries to lay down in the letter of intent that in that case he/she has the right to break off negotiations and/or negotiate a discount on the provisional purchase price.

7. Content of purchase agreement

In the letter of intent, the buyer often tries to make an advance payment on the content of the final purchase agreement, which has yet to be agreed upon. In this way he/she tries to draw any points of discussion to him/herself in advance. Consider, for example, the following remarks in the letter of intent: "The purchase agreement will contain the usual warranties, indemnities and securities to be provided for a transaction similar to this".

8. Time schedule and intended delivery date.

To make the acquisition process as smooth as possible, parties often include a table in the letter of intent with a time schedule and to-do list. This then further describes who does and delivers what and when. In this way, parties try to work towards the intended delivery date as efficiently as possible and avoid delays in the transfer.

9. Exclusivity

From the moment the letter of intent is signed, the buyer often requires seller exclusivity in the negotiation process for as long as the parties are in discussions.

10. Parties' costs related to the proposed acquisition.

Do each of the parties bear their own counsel fees throughout the remainder of the acquisition process and can the parties break off negotiations at any time without (partial) reimbursement of the other party's costs? Or is breaking off negotiations less optional, for example because the parties have agreed on a so-called break-up fee? A break-up fee is compensation for costs incurred that the break-up party has to pay to the non-break-up party if negotiations on the intended transaction break down.

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