Bidding Strategy and LOI Negotiations
How do you craft a compelling proposal? Understand the Letter of Intent (LOI), its key provisions, and how to set the stage for successful negotiations.
1 Initial Valuation Assessment and Indicative Offer
Before a formal LOI is signed, in many processes you’ll need to communicate an initial price expectation at an earlier stage. The timing and level of formality vary considerably depending on the size of the transaction and the type of process.
When and in what form?
Structured processes (M&A advisor engaged): The advisor often requests a written indicative offer before meeting in person. This serves as a pre-qualification—only interested parties with a realistic price expectation will be invited to a meeting. Your offer will be compared with those of other bidders, so it’s important to formulate it professionally and with sound reasoning.
Smaller deals / direct sale (under approx. 2 million EUR): A formal written indicative offer is usually not required. A valuation indication —that is, a rough estimate of your asking price—is sufficient, often only during or after the in-person meeting. After that, negotiations typically move directly to the LOI stage.
What should you keep in mind?
The basis is your preliminary valuation —derive your price indication from the company’s earning power and an industry-standard multiple (→ Module 3: Valuation & Pricing)
Not too low, not too high —an offer that’s too low comes across as unprofessional and can alienate the seller or advisor. An offer that’s too high will limit your options later in the negotiation
Always make it subject to due diligence —your indicative price is based on the information available so far and is expressly subject to the successful completion of due diligence
For structured processes: Keep the indicative offer in writing, clearly structured, and professional—it will be directly compared with other bidders
Indicative Offer ≠ Mere Price Indication – A key difference from a simple valuation indication is that an indicative offer outlines additional points: the planned transaction structure (equity stake, seller loan, earn-out components), an initial equity bridge (reconciliation from enterprise value to purchase price, taking into account debt and cash), as well as the planned due diligence priorities
It is not a sound strategy to initially announce a higher valuation if there are already indications that it will not hold up as the process progresses. Offer stability is one of the most critical criteria for both sales consultants and sellers when selecting a buyer.
If a valuation is subsequently lowered without valid new findings from the due diligence process, it destroys a great deal of trust—and jeopardizes the entire deal. Provide a realistic indication from the outset—one that you can stand by. Price reductions are acceptable only if they are objectively justified by concrete findings from the due diligence process.
The indicative offer is non-binding and may be adjusted following due diligence. It is a sign of serious intent to purchase—not a binding commitment. The formal LOI will follow only after we have met in person and conducted an in-depth analysis.
2 What is an LOI?
The Letter of Intent (LOI)—also known as a declaration of intent—is the key document between the analysis phase and due diligence. It establishes the framework for further negotiations.
Purpose and Timing
The LOI documents your serious intent to purchase and the key terms of the planned deal
It is submitted after reviewing the company’s documents (business plan or annual financial statements) and following an in-person introductory meeting
It comes before due diligence—and gives you the right to conduct a detailed review of the company
It sets the framework: purchase price, structure, terms, and timeline
An LOI is generally not binding —with the exception of certain clauses, such as those regarding confidentiality, exclusivity, and cost allocation. This means you can still withdraw or renegotiate after the due diligence process.
LOI vs. Binding Offer
LOI: Your purchase price offer is based on the information available to date and is subject to due diligence. This is the standard practice.
Binding Offer: This is more common in structured bidding processes for larger deals and is submitted only after the first phase of due diligence is complete. For small deals under 2 million EUR, the LOI is the norm.
3 LOI Content: The Key Economic Elements
A good proposal is clearly structured, backed by logical reasoning, and leaves room for negotiation. This section covers the economic substance of the LOI—what to include and how to justify it. Section 4 explains which clauses are binding (e.g., exclusivity).
The 6 Core Economic Elements
Purchase Price / Price Range – Your specific offer, ideally with a clear rationale (→ your valuation from Module 3)
Purchase Price Mechanics – Economic Effective Date (Locked Box or Closing Accounts), Enterprise Value, Equity Bridge (Cash-Debt-Free Calculation: Enterprise Value minus debt plus cash = purchase price for the shares)
Deal Structure – Share Deal or Asset Deal (→ Module 2)
Payment Terms – Lump-sum payment, installment payments, earn-out, seller loan (→ Module 2)
Closing Conditions – Under what conditions are you making the purchase? (e.g., new annual financial statements are available with no material deviations from the known business analysis, secured financing, etc.)
Timeline – When does due diligence begin? When is the deal expected to close?
In your LOI, refer to your valuation: “Based on an adjusted EBITDA of X € and an industry-standard multiple of Y, the enterprise value comes to Z €. Taking into account financial liabilities and working capital, I am offering a purchase price of [...] €.” → Module 3: Valuation & Pricing
The choice of the economic cut-off date determines the purchase price mechanism:
Locked Box: The reference date is in the past (e.g., the most recent annual financial statements). The purchase price is fixed—the buyer acquires the company retroactively as of that date. This is simpler, but the buyer bears the risk that no value has been withdrawn from the company since the reference date (no-leakage clause).
Closing Accounts: The valuation date is in the future (closing date). The purchase price is finally determined based on a balance sheet as of the closing date. This involves more effort, but the purchase price reflects the company’s actual condition at the time of transfer.
For small deals, the locked-box method is often preferred because it is simpler and leads to a faster closing.
Consultant vs. Direct Sales
With an M&A advisor: The LOI is often expected to be more formal. The advisor may have an LOI template. Your offer will be compared to others—so make sure to draft it professionally and comprehensively.
Direct sale: The letter of intent can be simpler and more personal. Nevertheless, all important points should be put in writing.
Frame your offer in a way that “leaves room”—an offer that’s too low comes across as unprofessional and can alienate the seller. An offer that’s too high limits your options. Start with a realistic figure and show that you’ve done your homework.
4 Binding Nature and Safeguard Clauses
The LOI is largely non-binding from a legal standpoint—but that does not mean it has no consequences. The economic terms you set forth in it are usually not deviated from —or only to a negligible extent—as the transaction progresses. It sets the framework for all further negotiations leading up to the purchase agreement—so draft it carefully: What is written here is effectively set in stone. Some clauses are also legally binding.
Generally NOT binding
Purchase price and payment terms —Subject to due diligence
Deal structure —May still change after due diligence
Timeline and milestones —guidelines, not fixed deadlines
Transition period —The seller’s handover period following closing
Generally BINDING
Confidentiality clause – Both parties agree to maintain confidentiality
Exclusivity clause – Two variants: closing exclusivity (less restrictive: the seller may not close the transaction with a third party) or negotiation exclusivity (more restrictive: the seller may not negotiate with third parties at all). The latter is more advantageous for the buyer.
Non-Competition and Non-Solicitation Clauses – The seller agrees not to operate a competing business or solicit employees of the target company for a defined period after the deal
Cost Allocation – Each party bears its own costs (attorneys, tax advisors, consultants).
Break-Up Fee / Cost Coverage Agreement – Sometimes agreed upon: Either compensation in the event of withdrawal without cause (break-up fee) or the seller covers the buyer’s due diligence costs if the seller terminates negotiations without good cause (cost coverage agreement)—a sensible alternative to exclusivity
The exclusivity clause belongs in the LOI, not in the NDA. Without it, you risk investing time and money in due diligence while the seller negotiates with others at the same time. Negotiate for at least 8 weeks—8–12 weeks is typical. Negotiation exclusivity (the seller is not allowed to negotiate with third parties at all) is more advantageous for you as the buyer than the weaker closing exclusivity.
5 What Should Be Included in the LOI
Your attorney will draft the LOI. You decide what it should include: You compile these points before you hire him—and you’ll use them later to review the draft. If one is missing, you’ll notice it here and not until the negotiation.
The usual components
Preamble – Who is buying? What is being purchased? Reference to previous discussions
Subject of the Purchase – Detailed description (company shares or assets)
Purchase price – Amount or range, basis for calculation, payment terms
Conditions – Due diligence, financing contingency, regulatory approvals
Exclusivity – Time period and type (closing or negotiation exclusivity); alternatively, a cost coverage agreement
Liability Framework – Framework for the subsequent warranty schedule in the purchase agreement (warranty areas, thresholds, maximum liability limits, statute of limitations)
Non-Competition and Non-Solicitation Clauses – Duration and scope of restrictions on the seller following closing
Confidentiality – Reference to existing NDAs or a separate clause
Timeline – Planned sequence: Due Diligence → Purchase Agreement → Closing
Cost Allocation – Each party bears its own costs
Binding Effect – Clarification of which clauses are binding and which are not
Don’t draft the LOI yourself. While it is largely non-binding, it sets the framework for all further negotiations and the subsequent purchase agreement—and certain clauses are indeed binding, particularly those regarding confidentiality and exclusivity. Compile the information listed above and have a lawyer draft the document. Mistakes at this stage can end up costing you dearly later on.
From the LOI to the Purchase Agreement—What Happens After Due Diligence → Module 8: Purchase Agreement & Closing
- LOI = Letter of Intent: Largely non-binding from a legal standpoint (except for confidentiality and exclusivity)—however, in practice, the agreed-upon terms cannot be changed without a valid reason
- Negotiate exclusivity: This gives you the assurance that the seller is not negotiating with other prospective buyers at the same time
- Justify the purchase price: Base your offer on earnings potential and multiples rather than just “throwing a number out there”
- Clearly formulate the terms: In particular, include due diligence and financing contingencies
- Have the LOI reviewed by legal counsel: It sets the framework for all further negotiations and the subsequent purchase agreement
- Offer stability: Provide a realistic price indication from the outset; a later adjustment without concrete due diligence findings destroys trust and jeopardizes the deal
Answer 5 questions about bidding strategy and LOI negotiations. All answers must be correct to complete the module.
Result savedThe result could not be saved.
Could not be saved. Please try again later.