From letter of intent to due diligence: the investigation in a business acquisition

What is a letter of intent (LOI)?

A letter of intent (LOI) marks the formal start of the acquisition process. It is a preliminary document in which you and the other party set out the framework and basic agreements for the intended takeover. This demonstrates that negotiations are serious and creates peace and clarity in an uncertain phase, building on the legal groundwork established at the start of your journey.

Although the letter of intent usually does not regulate the final takeover itself, it sets the course for the rest of the process. It serves as a compass that helps prevent misunderstandings at a later stage. Without this foundation, you enter an acquisition process without a safety net.

What do you record in the LOI?

In the letter of intent, you include topics that protect the relationship during the process. Important points are exclusivity, where the seller may not talk to anyone else for an agreed period, and strict confidentiality regarding sensitive company information.

In addition, you record the global conditions of the deal, such as the intended purchase price or the valuation method. You also define the conditions precedent under which the acquisition becomes final, such as the success of the due diligence investigation. This gives both parties the certainty that unreasonable demands will not be made halfway through this.

What is due diligence and why do you do it?

Due diligence is the phase in which you, as the buyer, open the 'hood' of the company. You verify whether the information provided by the seller about the business matches reality. The goal is to identify risks that could affect the value of the company.

By conducting a thorough investigation, you prevent unpleasant surprises later on. After all, you are buying not only the benefits but also the liabilities and potential legal obligations of the organization. The investigation therefore forms your most important basis for decision-making.

What exactly do you investigate?

The investigation focuses on various pillars of business operations, ranging from legal and financial aspects to commercial and operational matters. You examine all ongoing contracts with customers and suppliers, check the labor law position of staff, and verify the status of intellectual property.

In addition, you dive into the annual figures and tax positions to detect hidden debts or risks. Compliance issues, such as permits and environmental aspects, are also reviewed. This broad perspective is essential to get a complete picture of the health and future resilience of the company.

What do you do with the results?

Once the investigation is completed, you analyze the findings in relation to the original agreements. If significant risks come to light, you may decide to renegotiate the purchase price or demand additional guarantees and indemnities in the final purchase agreement. If you discover that the shares were purchased based on incorrect figures, it is crucial to act quickly.

Sometimes the results are so concerning that the deal cannot go through. In that case, the due diligence was successful because it protected you from a costly mistake. In short, the results determine the feasibility of the acquisition and the ultimate success of the transaction.

Practical considerations

• Ensure the LOI clearly distinguishes between binding and non-binding agreements.
• Use a realistic timeframe for the exclusivity clause to avoid unnecessary delays.
• Involve your financial and tax advisors at the start of the due diligence process.
• Be prepared for the fact that due diligence is an intensive process that requires time and focus.
• Carefully document all findings in a clear research report.
• Use the results to refine the contractual guarantees in the purchase agreement.
• Remain critical of the provided documentation and ask follow-up questions about ambiguities.
• Realize that due diligence also helps with the subsequent integration of the companies.

What should you do now?

A business acquisition is a legally complex process where the smallest details can have major consequences for your entrepreneurship. It is wise to involve a corporate law attorney from the very beginning, even before you sign an LOI. This specialist protects your interests, helps you avoid pitfalls, and guides you through every phase of the process, ensuring your strategy remains on track.