LOI (Letter of Intent)

A LOI (Letter of Intent) is the non-binding document that summarizes the terms agreed between buyer and seller before signing the definitive agreements. In M&A it is the first formal signal that a transaction is real: it sets enterprise value (typically on a multiple of EBITDA), consideration structure (payment at closing, seller note, contingent consideration), the exclusivity period, and conditions for closing. Binding are the confidentiality, exclusivity, and governing-law clauses; the rest is confirmed in the definitive agreement.

What does a LOI contain?

A typical LOI in M&A includes the following elements. Not all are binding; only confidentiality, exclusivity, and governing law are binding.

• Enterprise value and valuation base (e.g. multiple of normalized EBITDA).

• Consideration structure: split of payment into tranches (payment at closing, seller note, contingent consideration, and if applicable optional equity participation).

• Payment at closing: cash amount (often 15–30% of enterprise value in equity-financed SME transactions).

• Seller note (vendor financing): principal, interest rate, tenor, amortization, and any prepayment rights or guarantees.

• Contingent consideration (earnout): conditions that trigger or reduce payment (e.g. stability of key accounts, operational handoff, peso-for-peso reduction for post-closing discovered liabilities).

• Optional equity participation: in some cases offered to the seller as an alternative to part of the contingent consideration.

• Exclusivity: period (typically 30–60 days in Mexican SMEs) during which the seller does not negotiate with third parties.

• Closing conditions: satisfactory completion of due diligence, verification of assets, confirmation of key accounts, etc.

Those clauses (and often forum) are what legally bind; the rest — price, consideration structure, closing conditions — is confirmed in the final agreement. This distinction confuses many sellers: signing the LOI does not obligate closing at the stated price, but it does obligate not negotiating with others during exclusivity.

How are consideration and payments structured in a LOI?

In Mexican SME segment transactions a three-tranche structure is common. The following example illustrates a representative Mexican SME transaction with enterprise value of 10,000,000 MXN, consistent with typical structures in the segment: 15% cash at closing, 50% seller note at 12% annual for 3 years, 35% contingent consideration subject to customer stability, operational handoff, and peso-for-peso reduction for discovered liabilities.

Seller note (vendor financing). The buyer proposes it to reduce cash and external debt at closing. A note that represents a large portion of the price signals that the buyer has equity or credit limitations. The seller should review: interest rate versus alternatives, tenor and amortization profile, prepayment rights, guarantees or collateral, and buyer creditworthiness.

Contingent consideration. Typical conditions: retention of key customers, operational handoff without loss of talent or revenue, and no undisclosed liabilities. Contingencies discovered after closing are deducted from the contingent consideration peso for peso. Thus the buyer transfers transition and concentration risk to the seller; the seller must negotiate clear thresholds and timelines to know when and how much it will receive.

How do exclusivity and closing conditions work in a LOI?

Exclusivity is 30 to 60 days in Mexican SME transactions. During that period the seller may not negotiate with other buyers in exchange for the buyer advancing with due diligence and agreement drafting.

Closing conditions include:

• Satisfactory due diligence
• Verification of assets and liabilities
• Confirmation of key accounts
• As applicable: regulatory or partner approvals

A LOI that includes a detailed EBITDA normalization appendix indicates a sophisticated buyer: the valuation base is already argued, not just stated.

How does the LOI differ from the definitive agreement?

In practice, a well-drafted LOI reduces renegotiation in later stages; a vague LOI or an overly brief term sheet creates friction when moving to definitive documents.

Negotiation dynamics: the seller seeks more cash at closing and fewer conditions on contingent tranches; the buyer seeks to defer payment and tie it to verified performance and absence of liabilities. Finding the middle ground is what defines an executable LOI.

What do buyers and sellers ask about the LOI?

Which LOI clauses are binding and which are not?

Binding: confidentiality, exclusivity (period during which the seller may not negotiate with others), and governing law. The rest — enterprise value, consideration structure, closing conditions — is non-binding until the definitive agreement is signed. This is a common source of confusion: the seller must assume that only those clauses legally obligate it; price and payments are fixed in the final agreement.

Why does the buyer propose a seller note?

Because it reduces the need for equity or external debt at closing: part of the price is financed by the seller itself. A buyer that proposes a large note signals limitations of its own capital or bank financing. The seller must evaluate interest rate, tenor, prepayment rights, guarantees or collateral, and the buyer’s risk profile before accepting.

How does contingent consideration (earnout) work in a LOI?

It is the part of the price paid only if post-closing conditions are met: stability of key customers, operational handoff, revenue or EBITDA targets. Contingencies discovered after closing (liabilities, breaches) reduce the contingent consideration peso for peso. The buyer thereby transfers transition and concentration risk to the seller; the seller negotiates clear conditions and bounded timelines.

How long does exclusivity typically last in a LOI in Mexico?

In Mexican SME segment transactions, the exclusivity period is typically 30 to 60 days. It is the time during which the seller may not negotiate with other buyers in exchange for the buyer advancing with due diligence and agreement preparation. A period that is too long hurts the seller if the deal does not close; one that is too short may discourage the buyer from investing in the process.