The Letter of Intent (LOI): What This Key Document Contains in the Sale of Your SME

The letter of intent (LOI): the document that formalises the acquisition of your SME

In the process of selling an SME in French-speaking Switzerland, there is a pivotal moment: the point at which informal discussions give way to a structured framework. That moment is the signing of the letter of intent, also known by the acronym LOI (from the English Letter of Intent).

For many business owners considering selling their company, this document remains poorly understood — sometimes underestimated, sometimes overrated. Yet, when well drafted, the LOI is a protective step for both parties, and in particular for the seller. It lays the foundations of the transaction even before the lawyers and accountants step in for the final phases.

In this article, we break down what the letter of intent is, what it contains, what is binding or not, and why you should pay particular attention to it — especially if you are conducting a direct sale without an intermediary.

What is the letter of intent in an SME sale?

The letter of intent is a document drafted by the prospective buyer and addressed to the seller. It marks the end of the exploratory phase and the beginning of a structured acquisition process. It is not yet the sale contract — far from it — but it sets out its essential outlines.

In French-speaking Switzerland, as in most French-speaking countries, the LOI is common practice in transactions between SMEs, even though it is not legally required. Its role is above all practical and psychological: it signals that the buyer is serious, has thought through their terms, and is ready to commit to in-depth due diligence.

For the seller, receiving an LOI means leaving the zone of uncertainty. It does not mean the sale is concluded, but it does mean that a concrete counterpart is putting their intentions on paper.

What does a typical letter of intent contain?

The LOI may vary in length and precision depending on the complexity of the business and the buyer's profile. Here are the elements generally found in a well-constructed letter of intent:

1. Identification of the parties

The LOI clearly states the name of the buyer (natural or legal person), that of the seller, and the company concerned by the transaction. This identification is the minimum basis for the document to have any value.

2. Description of the proposed transaction

The LOI specifies the nature of the transaction: is it a sale of shares (share deal), a sale of assets (asset deal), or a combination of the two? This distinction is fundamental because it has significant tax and legal implications for both the seller and the buyer.

3. The indicative price and payment terms

This is often the most eagerly awaited part. The buyer indicates a valuation range or a precise price, together with the proposed payment terms:

• Cash payment on signing
• Payment in instalments over several years
• Earn-out clause (additional price contingent on future performance)
• Partial financing through bank credit or a vendor loan

These elements are generally conditional: they remain valid subject to the results of due diligence. The seller must therefore clearly understand that the price stated in the LOI is not final.

4. Conditions precedent

The LOI lists the conditions that must be met for the transaction to go through. These commonly include:

• Obtaining bank financing
• Satisfactory results from due diligence
• The consent of any minority shareholders
• The absence of hidden liabilities or significant litigation
• The retention of certain key customers or employees

5. The transaction timeline

A good LOI sets a clear timeline: expected duration of due diligence, target date for signing the final contract, and possibly a date for the handover of management. This timeline is essential so that the seller can plan their own transition.

6. Confidentiality and exclusivity clauses

Two clauses deserve particular attention:

• Confidentiality: the parties undertake not to disclose the information exchanged during the process.
• Exclusivity: the seller undertakes not to negotiate with other buyers for a defined period (often 30 to 90 days).

These two clauses are generally binding, even in an LOI described as non-binding. This is a crucial point that we will develop below.

Binding or non-binding LOI: a vital distinction

One of the most frequent misunderstandings about the letter of intent concerns its legal nature. Many buyers — and even sellers — believe that an LOI commits them to nothing. That is incorrect.

In reality, the LOI is a hybrid document: some clauses are binding, others are not.

What is generally non-binding

• The indicative price (liable to change after due diligence)
• The structure of the transaction
• Conditions precedent not yet verified
• The general intention to acquire

What is generally binding

• The confidentiality clause
• The exclusivity clause (and its duration)
• The costs incurred by each party (who pays what if the deal falls through?)
• The terms of access to information for due diligence

For the seller, the exclusivity clause is potentially the riskiest. If it is too long or poorly framed, it can prevent you from negotiating with other serious buyers for weeks, or even months. It is therefore essential to negotiate it carefully before signing.

Why the LOI also protects the seller — especially in a direct sale

The LOI is often presented as a tool serving the buyer. That is true: the buyer drafts it and sets out its terms. But for the seller, this document is also a valuable protection, provided you know how to use it.

Here is why:

• It filters out buyers who are not serious. A buyer who is reluctant to draft a clear LOI is often not ready to genuinely commit to an acquisition process.
• It frames due diligence. Without an LOI, access to your sensitive data (accounts, contracts, HR) is difficult to control. The LOI defines what may be disclosed, to whom, and under what conditions.
• It sets a reference price. Even if only indicative, this price allows you to anticipate negotiation margins and prepare for post-due diligence adjustments.
• It creates momentum. The timeline set out in the LOI protects you against buyers who let things drag on indefinitely without making up their mind.

In the case of a direct sale, that is to say without a specialised intermediary, the LOI takes on even greater importance. In the absence of a business transfer adviser to structure the exchanges, it is often the only formal framework between the parties before the sale agreement is signed.

What the seller should negotiate in the LOI

Receiving an LOI does not mean accepting it as it stands. As a seller, it is very much in your interest to reread each clause carefully and to negotiate some of them before signing.

Here are the points on which you should be particularly vigilant:

• The duration of exclusivity: it should not exceed 45 to 60 days for a typical SME, with the possibility of extension by mutual agreement.
• The scope of due diligence: specify which documents may be disclosed and which remain confidential until a later stage.
• Break clauses: what happens if the buyer walks away without a valid reason? Do they owe compensation?
• The treatment of information if the deal fails: the data provided must be returned or destroyed if the transaction does not go through.
• Communication to third parties: neither you nor the buyer should be able to communicate publicly about the transaction before final signing.

The LOI and the rest of the process: what comes next

The LOI is not an end in itself. It opens a new phase of the transfer process: due diligence. It is during this phase that the buyer will analyse the business in depth — its finances, its contracts, its legal obligations, its risks — to confirm (or adjust) their offer.

In French-speaking Switzerland, due diligence is generally carried out by fiduciaries, lawyers or advisers specialising in business transfers. It can last from a few weeks to several months depending on the size and complexity of the SME.

At the end of due diligence, three scenarios are possible:

• The transaction proceeds on the terms of the LOI, or with minor adjustments
• The price is renegotiated downwards because of elements discovered
• The buyer withdraws (citing an unfulfilled condition precedent)

In all cases, the LOI will have allowed you to enter this process with a clear framework and a minimum level of protection.

Conclusion: do not neglect the letter of intent in the sale of your SME

The letter of intent is much more than an administrative formality. It is a strategic document that structures the relationship between seller and buyer, frames the exchange of sensitive information, and sets the milestones of the transaction to come.

For any business owner in French-speaking Switzerland considering selling their company, understanding the LOI — what it contains, what binds, what protects — is an essential step. Before signing it, do not hesitate to seek support from an adviser specialising in SME transfers. An outside perspective can save you costly mistakes and help you negotiate on the best possible terms.

The sale of your business is probably the most important transaction of your professional life. The letter of intent deserves all the attention it requires.