Key documents in an M&A process

In an M&A process, several documents structure the negotiations and frame the commitments of the parties involved. Among them, the NDA (Non-Disclosure Agreement), LOI (Letter of Intent), NBO (Non-Binding Offer), Term Sheet, and SPA (Share Purchase Agreement) play key roles at different stages of the transaction. Understanding their differences and purpose helps streamline the process and avoid legal or strategic pitfalls.

The NDA (Non-Disclosure Agreement): Safeguarding Confidentiality

The NDA is typically the first document signed in an M&A process. It governs the exchange of sensitive information between the seller and potential buyers, ensuring that no strategic data is disclosed to third parties.

Main objectives of the NDA:

• Protect confidential information: The seller shares financial, operational, and strategic data with potential buyers, who agree not to disclose it.
• Limit the use of information: Buyers may only use this information for due diligence and negotiation purposes.
• Define the duration of confidentiality: NDAs generally remain in force for several years, even if discussions fail or close.
• Prevent poaching: Some NDAs include a clause prohibiting buyers from approaching or hiring the target company’s employees.

A well-drafted NDA is essential to protect the seller and foster a relationship of trust between the parties.

The LOI (Letter of Intent): formalizing interest

Once confidentiality is ensured via the NDA and preliminary discussions progress, the buyer may submit a Letter of Intent (LOI). This document marks a key milestone in the M&A process, as it formalizes the buyer’s interest in the target and outlines the framework of a potential transaction.

Key features of the LOI:

• Statement of intent: The buyer expresses interest in entering exclusive negotiations with the seller.
• Indicative offer elements: The LOI includes the proposed price, payment terms, and transaction conditions.
• Exclusivity or non-binding clauses: Some LOIs include exclusivity provisions preventing the seller from negotiating with other buyers during a set period.
• Due diligence: The LOI often states that closing the transaction is subject to satisfactory legal, financial, and operational audits.

Although generally not legally binding, the LOI represents a strong moral commitment and sets the stage for further discussions.

The NBO (Non-Binding Offer): an indicative proposal

Before or alongside the LOI, a buyer may submit a Non-Binding Offer (NBO), which reflects their interest in the target. The NBO is typically used in competitive processes where several potential buyers are invited to submit indicative proposals.

Typical content of an NBO:

• Indicative valuation: An initial price estimate for the acquisition.
• Working assumptions: Based on information disclosed up to that point.
• Key conditions: Including due diligence and securing financing.
• Intention to move forward: Signaling the buyer’s willingness to deepen negotiations.

The NBO is a key step for identifying serious buyers and structuring the next phase of the process.

The Term Sheet: toward a more structured agreement

After the NBO and LOI phases, and if discussions progress positively, the buyer and seller may choose to formalize more detailed terms in a Term Sheet. This document is more structured than an LOI and may contain binding clauses.

Key components of the Term Sheet:

• Final or refined acquisition price
• Payment terms (cash, shares, earn-out, etc.)
• Conditions precedent (regulatory approvals, successful due diligence, etc.)
• Specific clauses (warranties, non-compete provisions, etc.)

The Term Sheet serves as the basis for drafting the final sale agreement (SPA) and helps prevent misunderstandings while accelerating the finalization of the deal.

The SPA (Share Purchase Agreement): the final sale agreement

The Share Purchase Agreement (SPA) is the final document that legally formalizes the transaction and the transfer of ownership of the target company’s shares. It is signed after negotiations conclude and all conditions in the Term Sheet are met.

Content and structure of the SPA:

• Purchase price and adjustments: The SPA sets the final price and may provide for post-closing adjustments (e.g., based on cash, net debt, or working capital).
• Payment terms: It details whether the payment is made in cash, shares, or through an earn-out mechanism (conditional future payments).
• Representations and warranties: The seller guarantees the accuracy of disclosed information and the absence of hidden liabilities.
• Non-compete clauses: The seller may be prohibited from starting or joining a competing business for a defined period and geographic area.
• Conditions precedent and closing: Share transfer occurs only after specific conditions are met (e.g., regulatory approvals, financing).
• Indemnities and remedies: Defines the parties’ responsibilities and potential penalties or compensation in case of breach.

The SPA is the final step before the acquisition is completed. It marks the end of negotiations and the start of the post-deal integration phase. A carefully drafted SPA protects both parties and helps avoid future disputes.

The NDA, LOI, NBO, Term Sheet, and SPA are all essential documents in the M&A process. The NDA ensures confidentiality from the outset. The NBO and LOI reflect the buyer’s intent and shape negotiations. The Term Sheet lays out the detailed framework for the transaction ahead of the final agreement. And the SPA formalizes the deal. Each document plays a specific role, and managing them effectively is key to a successful acquisition.