In a transfer transaction, the LAW, Letter of Intent, marks a key point, before it, the discussions remain exploratory and after it, the process takes a precise direction, with a price, a calendar and working conditions which structure the rest of the deal. The LAW is not a legal act, but draws a framework that will influence the entire transaction.
In the tech ecosystem, scale-ups and SMEs alike are faced with this when they open their capital or consider an exit. Lack of knowledge of this document often creates misunderstandings and even negotiation errors.
A non-binding document… but decisive
Legally, the LAW does not oblige either the buyer to buy or the seller to sell; it must remain indicative so as not to be reclassified as a promise to sell.
In fact, its impact is much stronger, because as soon as it is signed, the teams reorganize, the advisors are activated, due diligence begins, and other potential buyers are put aside if exclusivity is granted. The price offered becomes a reference that is difficult to move.
The LAW is not a commitment, but it strongly guides the process.
What a LAW contains
The price and its structure.
It sets an indicative level, but also the way in which the price will be paid: cash, earn-out, reinvestment (rollover), conditional price supplements.
Financial assumptions.
The definition of the scope of net debt, restatements of EBITDA or accounting adjustments strongly influence the real valuation. These elements, inserted early in the LAW, condition future negotiation.
Exclusivity.
This is the most binding commitment. During this period, the seller can no longer discuss with other buyers and its duration is a major lever in the balance of power and must be calibrated precisely.
The calendar.
The LAW sets the tempo with due diligence, drafting of the SPA, internal authorizations, closing. This calendar creates time pressure which structures the pace of the deal.
Intentions regarding the management team.
In a scale-up: retention of founders, duration of support, principles of a management package.
Why does the LAW weigh so much on the future?
Three effects explain its influence:
- A psychological anchoring of the price, even indicative, it becomes the basis of discussion. Any subsequent variation requires solid justification.
- A common roadmap, bankers, lawyers, investors and managers align on the proposed structure, which reduces the room for revision.
- Early distribution of risk, the LAW already makes it possible to identify which risks will be borne by the seller (guarantees, debts, corrections) and which will be the responsibility of the buyer.
Common errors
Unsupported leaders often make the same mistakes:
- accept too long an exclusivity
- sign without understanding the financial restatements
- neglect the impact of the management package on negotiation
- validate an LOI before having aligned all the shareholders
- assume that a LAW is “corrected later”.
In a competitive process, these errors greatly reduce negotiating power.
Before signing: essential checks
A leader must:
– have the price structure analyzed;
– regulate exclusivity, in terms of duration and conditions;
– check the impact of financial definitions;
– have the LAW reread by a specialized M&A lawyer;
– ensure alignment between founders, shareholders and board.
The LAW must never be treated as a simple administrative milestone, because it sets the rules of the game before the complete opening of the data and conditions the balance of power until closing.
