The Business Transition Blog

What’s The Difference Between a LOI (Letter of Intent) and a SPA (Share Purchase Agreement)?

I’m not the technical type so I’m not going to suggest I have the answers to this question, but I do have some insights.  And perhaps there are some readers who would like to weigh in.

Here’s the situation. After some preliminary meetings and sharing of information, the broker brings a letter of intent to the seller, indicating a price that was agreeable to the seller, some basic legal speak and an indication that the next step is for the purchaser to do his due diligence.

The list of due diligence requests would choke a horse. Everything from financials, to tax returns, to client lists and contracts, to employee lists and contracts; about 40 items in total. The seller contacts her lawyer (smart lady) and runs this by him. The lawyer says ‘No!’ because the LOI is not a legally binding agreement. If agreed to, allowing the due diligence to proceed, the seller has given the buyer free rein of her most intimate details – with no seriously binding agreement to proceed if the buyer simply changes his mind. Sure the buyer signed a non competition and a confidentiality agreement, but that wouldn’t stop anyone who lacks scruples.

The broker (and one book I consulted) suggests that going straight to due diligence after a LOI is normal and that a SPA is the last document signed which includes all the documentation that came out of the due diligence.

The lawyer (and two books I consulted) disagreed and said the SPA indicates a serious commitment (versus intent) to proceed with the purchase of the company, subject to the due diligence not uncovering any skeletons or surprises that were not already discussed.

I’d be interested in hearing any stories of business owners or lawyers who had their own personal learning experience related to this subject.