A good M&A LOI or term sheet defines the transaction scope, price and adjustments, payment terms, transaction conditions, seller liability and exclusivity. Business terms are usually non-binding, but specified provisions may apply from signing. Guaranteed deferred consideration is payable regardless of performance; an additional earn-out depends on agreed targets.
A buyer offers an attractive valuation and proposes signing an LOI. The document is short and most terms are described as non-binding. It is tempting to leave the details for later. Yet this is when the reference point for subsequent negotiations is established, often just before the seller grants exclusivity.
The owner needs to understand how much they may actually receive, when they will receive it and what conditions apply. This guide takes the seller's business perspective, with particular relevance to transactions in Poland and CEE.
What is the difference between an NBO, an LOI and a term sheet?
An NBO, or non-binding offer, usually sets out a prospective buyer's initial position based on available information: valuation, proposed structure and assumptions. In a competitive process, it helps the seller compare bidders.
An LOI, or letter of intent, and a term sheet often record the principal terms agreed between the parties. Both can be used for a business acquisition or a partial investment. Although term sheets are frequently associated with fundraising, they also have a role in M&A.
These are practical distinctions rather than fixed legal categories. An LOI may begin as a unilateral proposal; an NBO may be negotiated. The wording, the parties' intentions and the governing law matter more than the title. DLA Piper discusses the similar functions of LOIs and term sheets.
Is the price in an LOI the amount the owner receives?
Not necessarily. Enterprise value (EV) is different from equity value, the price attributable to the shares. The stake acquired, agreed debt and cash treatment, working capital adjustments and payment structure all affect the seller's proceeds.
Illustrative example: an offer values the business at PLN 30 million EV. For a purchase of 100% of the shares, agreed net debt of PLN 5 million and no other adjustments produce an equity price of PLN 25 million. If PLN 3 million is held back as security for claims, the seller receives PLN 22 million at completion before tax and transaction costs. The balance is released under the agreement. A holdback is not the same as a valuation reduction, but changes payment timing and risk.
The parties should understand the main definitions of debt, cash and working capital. Shareholder loans, leases and overdue liabilities may require specific treatment. The same item should not inadvertently reduce the price through both net debt and working capital.
When is the final purchase price determined?
Completion accounts adjust the price using agreed financial positions at completion. A locked-box mechanism instead refers to an agreed historical balance sheet, with rules governing transfers of value out of the business between that date and completion.
The LOI need not contain a complete accounting schedule. It should identify the intended mechanism, reference date, main principles and unresolved issues. The phrase “cash-free, debt-free” does not answer every question.
Why does deferred payment introduce additional risk?
A higher headline price may be less attractive than a lower amount paid entirely at completion. Separate immediate consideration, unconditional deferred payments, holdbacks and earn-outs dependent on future performance.
For an earn-out, agree the metric, measurement period and calculation rules. Who decides on costs, investment and revenue allocation after the sale? A payment to the seller may depend on decisions made by the new owner. For unconditional deferred consideration, the due date, security and creditworthiness of the payment obligor are central.
How can a seller protect an earn-out when the buyer controls the business?
Remaining a director or manager does not by itself protect the earn-out. The seller may run daily operations while the buyer controls budgets, staffing and integration. Negotiate operational authority, agreed resources and the decisions requiring consultation or consent. Buyers may resist extensive veto rights; targeted restrictions and calculation adjustments can be alternatives.
Negotiated protections can address the business plan, working capital, diversion of customers or contracts to other group companies and charges for central services. They should balance the agreed opportunity to achieve the target with the buyer's legitimate integration plans. These protections are described by TLT.
Can provisions and write-downs reduce an earn-out?
Yes, depending on the metric and its definition. Provisions, receivable or inventory write-downs, integration costs and revised cost allocations can affect the reported result. EBITDA does not automatically exclude every provision or impairment effect. Such entries may be justified or required by accounting rules; a lower result is not in itself evidence of manipulation.
Specify how reported earnings are reconciled to the contractual earn-out result. The parties can agree treatment of provisions, write-downs and subsequent reversals, consistent methods, and exclusions for specified integration or group costs. Set the hierarchy of rules if they conflict. Required entries remain in the books; the contractual price calculation can apply agreed adjustments. Osborne Clarke explains why accounting estimates and definitions matter.
Can the seller negotiate a guaranteed minimum payment?
Yes. The parties can agree a minimum purchase price independent of future performance, with an additional earn-out above that amount. The clearest structure separates consideration paid at completion, unconditional deferred consideration and performance-dependent consideration. Calling a payment a “minimum earn-out” is insufficient if the actual entitlement remains conditional.
Illustrative example: PLN 20 million at completion, PLN 3 million unconditionally payable after one year and up to PLN 5 million of additional earn-out. The minimum agreed price is PLN 23 million and the maximum is PLN 28 million, assuming no other adjustments. Security and the buyer's rights to set off claims need separate agreement. An unconditional entitlement does not remove the buyer's insolvency risk.
A performance threshold does something different: it triggers conditional payment. An all-or-nothing threshold creates a cliff edge. A sliding scale can soften it: a payment increasing linearly from zero at PLN 4 million EBITDA to PLN 2 million at PLN 5 million gives PLN 1 million at PLN 4.5 million EBITDA. This remains conditional consideration and does not guarantee a minimum payment.
How can the seller verify the calculation?
Agree reporting during the measurement period, access to supporting records, adviser review, objection deadlines and payment of undisputed amounts. Define which accounting disputes an independent expert can decide and which contractual disputes require a different process. Verification rights are discussed by Davis Wright Tremaine.
Also address removal of the seller from management, onward sale of the business and breach of operating protections. Negotiated remedies may include calculation adjustments or accelerated settlement under an agreed formula. These are not automatic rights. Outline the main expectations in the LOI and develop the detailed mechanics in the sale agreement.
What should be agreed before granting exclusivity?
The buyer wants to invest in diligence and documentation without losing the deal to another bidder. The seller gives up alternatives for a period. Exclusivity should have a defined scope, fixed expiry date and extension only by agreement.
Connect the timetable to diligence and drafting milestones. Discuss early release if the buyer withdraws, materially changes its offer or fails to progress. Duration should reflect complexity and data readiness. Automatic extensions can leave the seller tied up for longer than expected.
What conditions allow the buyer to walk away?
Due diligence, investment committee approval, financing, regulatory clearance and agreement on final documents are separate conditions. Understand what has already been approved, what remains outstanding and who makes the decision.
“Satisfactory due diligence” gives the buyer broad discretion. While it cannot always be eliminated, the parties can define the scope, deadlines for raising significant findings and valuation assumptions being tested. Signing the sale agreement and completing the transaction may be separate events; the timetable should reflect any intervening approvals.
See also Due diligence before a company sale: 10 red flags.
What liability and involvement remain after the sale?
The headline price does not capture seller liability. Discuss warranties, liability caps, claim periods, specific risks and security for claims. The LOI need not resolve every detail, but the parties should understand each other's principal expectations.
If the owner stays, address responsibilities, remuneration, handover and non-compete expectations. For a partial sale, consider shareholder decision rights, funding, dividends and the future exit. Retained equity creates an ongoing relationship, not simply another instalment of cash.
Is an LOI legally binding?
An LOI is often non-binding as to the proposed acquisition, with expressly binding provisions such as confidentiality, exclusivity and expenses. It should distinguish those categories and address duration, survival and any existing NDA. Its legal effect depends on the wording, circumstances and governing law.
For a document governed by Polish law, Article 72 § 2 of the Civil Code addresses liability for negotiations conducted contrary to good customs, particularly without an intention to conclude an agreement. Withdrawing from a transaction does not automatically create liability. Foreign descriptions of LOI practice should not be treated as statements of Polish law.
Non-binding business terms still anchor negotiations. New diligence findings can justify changes, so record material assumptions and identify genuinely open issues. Wyrick Robbins outlines key LOI topics and the importance of separating binding and non-binding provisions.
Five questions before signing an LOI
- What am I selling, and what might I receive? Include adjustments, holdbacks and conditional payments.
- What does the buyer's decision depend on? Identify outstanding diligence, approvals and funding.
- What alternatives am I giving up? Understand the duration and termination of exclusivity.
- What risk remains after completion? Assess liability, payment security and the owner's continuing role.
- What is agreed and what remains open? Both parties should give the same answer.
A good LOI need not be long. It should resolve issues that materially affect proceeds, risk and the ability to end the process. Business, legal and tax input is most useful before major concessions are recorded.
Frequently asked questions about LOIs and earn-outs
Are term sheets used in M&A?
Yes. A term sheet can record the main terms of a full or partial business sale, much like an LOI. Its title does not determine its legal effect.
Is a guaranteed minimum earn-out the same as a performance threshold?
No. A guaranteed minimum is payable regardless of performance if agreed on that basis. A performance threshold triggers conditional consideration and may produce no payment below the target.
Must the seller retain control of the business?
Not necessarily. Negotiate appropriate influence over decisions affecting the earn-out, or adjustments for their effects, alongside reporting and verification rights.
What matters most before exclusivity?
Agree the scope, economics, buyer conditions and timetable. Exclusivity itself needs a defined scope, expiry date and early termination arrangements.
Sources and scope
This is a business guide, not an LOI template or legal advice. Legal effect depends on the document and governing law. The linked law-firm publications discuss transaction practice in different jurisdictions. Polish negotiation rules are set out in Article 72 of the Polish Civil Code.
Does the headline price still look attractive once payment risk, seller liability and the buyer's conditions are taken into account?