A birds-eye view of an M&A process (II): the first legal steps

A successful M&A process (a merger or acquisition of one or more companies) requires more than just agreement on price. In this blog series, we discuss step by step the key legal phases of an acquisition: from the letter of intent and due diligence to warranties, indemnities, financing, the purchase agreement, and the period post-closing. We share practical insights from our daily practice aimed at entrepreneurs, investors, and advisors who want to keep control over the acquisition process. In this second episode, we will address the first legal steps taken in the M&A process.

NDA, (indicative) offer, and Letter of Intent

Once the buyer and seller have connected, a phase begins that is often underestimated in practice. Many entrepreneurs perceive the confidentiality agreement and the Letter of Intent as preparatory documents, while it is precisely here that the cornerstones for the remainder of the transaction process are often laid. This phase of the process is not just about confidentiality and planning but also about expectations, exclusivity, and negotiation space.

The NDA: more than just confidentiality

Almost every transaction begins with a confidentiality agreement, often referred to as NDA. The purpose seems simple: to protect confidential information. In reality, an NDA usually covers more. In addition to confidentiality, the document often contains provisions regarding the permitted use of information, the circle of persons to whom information may be disclosed, the return or destruction of documents, and sometimes also contact prohibitions towards employees, customers, or suppliers.

For sellers, this is essential. In an acquisition process, sensitive information about margins, customers, contracts, strategy, personnel, and technology is often shared. At the same time, it is important for buyers that the NDA provides enough room to involve financiers, advisors, and internal decision-makers. An overly restrictive NDA can unnecessarily slow down the process; a too broad NDA can be undesirable for the seller.

The indicative offer: look beyond the amount

After an initial round of information, a buyer often makes an indicative offer. This offer gives direction to price, structure, timing, and the manner in which the buyer wants to shape the transaction. However, the amount alone does not say everything. An apparently strong offer may in reality still heavily depend on due diligence, financing, internal approvals, or the absence of material adverse outcomes.

Therefore, it is wise for sellers not only to look at the price but especially to the firmness of the offer. How much leeway does the buyer still have to revisit the principles later? Is there already clarity regarding the transaction structure, expected timing, and contingencies? And is the offer indeed executable?

The Letter of Intent outlines the contours of the deal

After the indicative offer, the Letter of Intent usually follows, also known as LOI or term sheet. Here, the main principles of the intended transaction are recorded. Think of price, structure, exclusivity, planning, due diligence, and a general route to signing and closing the transaction.

Although a LOI is often largely non-binding, it holds great practical significance. In this phase, the principles are often established that later become hard to deviate from. It is also commonly agreed that certain components are indeed binding, such as exclusivity, confidentiality, cost sharing, applicable law, and dispute resolution.

In this phase, it’s all about expectation management

Many parties perceive the LOI phase as noncommittal, but that noncommittal nature is not unlimited. Clear contingencies, careful wording, and clear timelines are important to prevent later disputes. The further parties progress in the process and the more concrete their mutual expectations become, the more relevant this phase becomes both legally and commercially.

A good NDA and LOI therefore protect not only crucial information about the business but also the negotiating position of the parties. They help maintain momentum in the process by outlining and documenting the main points early on. If you are at the beginning of an acquisition process and want to clarify which agreements you should or should not document in the first phase, we are happy to advise you on that.