Letter of Intent in Business Acquisitions: Your Roadmap to a Confident Deal

If you are a founder or CEO exploring a business acquisition, you know how fast initial interest can turn into high-stakes negotiation. Before you engage lawyers or commit capital, the journey starts quietly—confidentiality agreements, headline numbers, and that first check for strategic fit. When both sides are ready to get serious, the LOI moves the conversation from handshake to structure.

A strong LOI is not red tape. It is your shield, your roadmap, and your lever to keep control before legal costs and management bandwidth spiral.

Here is how the LOI works in Malaysia, why each term matters, and how you can leverage every clause to protect your ambition and your bottom line.

What Is a Letter of Intent (LOI)?

An LOI is the document that sets out the key commercial terms of a proposed business acquisition. It is the bridge between informal discussions and a full legal contract. With a clear LOI, you flag dealbreakers early, protect both sides, and give everyone a fair chance to walk away before time and money are sunk.

Key Clauses Every CEO Should Know

1. Parties

List every buyer and seller, with full legal names and registration details. This avoids negotiating with the wrong people or intermediaries who cannot close.

2. Purpose and Background

Explain the commercial reasons for the deal and what both parties aim to achieve. This keeps everyone aligned as negotiations progress.

3. Structure of the Transaction

Is it a share sale, asset sale, business transfer, or something else? Define exactly what is included (assets, subsidiaries, IP, contracts) and what is not. This stops misunderstandings or scope creep later.

4. Basis of Valuation

Spell out how the business is valued. Common approaches:

• EBITDA multiple: Based on earnings before interest, tax, depreciation, and amortisation.

• Net asset value: Assets minus liabilities.

• Revenue multiple: For tech or fast-growth businesses.

• Discounted cash flow: Projected future cash flows, discounted to today’s value.

Be clear on which accounts will be used, what normalisations or add-backs apply, and whether cash, debt, or surplus assets are included. Upfront agreement prevents price disputes and makes later adjustments easier.

5. Purchase Price and Payment Terms

Set out the price and how it will be paid—lump sum, staged payments, earn-outs, or retention. Confirm timing, currency, and any price adjustment formula.

6. Method of Financing

Clarify if the buyer is funding from cash, loans, investors, or a mix. Sellers may ask for proof of funds to avoid wasted time.

7. Seller Financing

If the seller is lending part of the purchase price, explain the loan amount, terms, security, interest rate, and repayment schedule. This is common in management buyouts or when external funding is tight.

8. Key Terms and Conditions

Highlight critical conditions—regulatory approvals, shareholder or board sign-off, third-party consents, and completion of due diligence.

9. Working Capital Treatment

Agree on a “target” level of working capital at completion. If the actual figure is lower, the price drops; if higher, the seller gets extra. This keeps the business stable and discourages last-minute cash sweeps or changes to creditors and debtors.

10. Inventory Treatment

Define how inventory is valued (book, cost, or market value) and whether obsolete stock is excluded. Plan for a physical count at completion.

11. Add-Backs

List adjustments to earnings to get a true picture—remove one-off costs, owner’s above-market salaries, or extraordinary items. This gives a realistic, clean profit number for valuation.

12. Due Diligence

Set out what the buyer can inspect (financials, tax, legal, operations), what access is needed, and the timing. This protects both sides and speeds up the deal.

13. Exclusivity (No Shop Clause)

Protect the buyer’s investment of time and money. The seller cannot negotiate with other parties for a set period.

14. Confidentiality

Both sides agree to keep negotiations and shared information private, even if the deal does not close.

15. Representations and Warranties (Expected)

Make clear what assurances the seller must provide in the final contract. This includes:

• Authority and capacity to sell

• Clean title to assets or shares

• No undisclosed liabilities

• Accurate accounts

• Compliance with law and tax

• No pending litigation

Addressing this now avoids friction at contract stage.

16. Timetable

Lay out dates for key steps—due diligence, contract signing, anticipated completion—so the process does not lose momentum.

17. Binding and Non-Binding Provisions

State which clauses are binding (such as confidentiality, exclusivity, governing law, costs) and which are not (price, structure, terms “subject to contract”).

18. Termination

Explain how either party can walk away, and what continues if they do (usually confidentiality and return of documents).

19. Governing Law and Jurisdiction

Set the legal system—Malaysian law is standard for local deals. This controls how disputes are resolved.

Optional Clauses: Extra Protection and Leverage

No two transactions are the same. The following clauses can be added to lock in trust, protect key assets, or clarify expectations—especially for complex or competitive deals.

1. Deposit or Escrow Arrangements

A deposit or escrow shows real commitment. The buyer pays a deposit or places funds with a neutral third party. This protects the seller if the buyer walks away without reason and ensures the buyer’s funds are only released if all terms are met.

When to use: If there’s uncertainty about intent, or in competitive sales processes.

2. Break Fees

A break fee is a set payment if one party pulls out after the LOI is signed but before completion. It compensates the other for time and costs already spent.

When to use: In larger deals or where significant due diligence is required.

3. Non-Solicitation and Non-Compete

Protects the business by preventing the buyer from hiring employees or soliciting clients if the deal falls through. A non-compete stops either party from setting up a rival business using inside information.

When to use: If you want to guard team, client relationships, or confidential know-how during negotiations.

4. Pre-Closing Covenants

Rules for each party between signing and completion. For example, the seller must run the business as usual, not incur new debts, or sell assets. For buyers, this could mean maintaining confidentiality or progressing funding.

When to use: If you are concerned about business value dropping before closing, or about harmful changes.

5. Announcement and Publicity Restrictions

Prevents either side from making public announcements or press releases without joint approval. This shields reputation and avoids unwanted speculation.

When to use: Where confidentiality is key or where media attention could harm the deal or business.

6. Allocation of Costs and Expenses

Sets out who pays for what—legal, accounting, due diligence costs. Usually, each party covers its own, but sometimes costs are shared or paid by the party that pulls out.

When to use: For clarity, or in cross-border deals with unusual regulatory or professional fees.

7. Conditions Precedent

Lists extra requirements that must be satisfied before signing the full agreement—regulatory approvals, landlord or customer consents, third-party financing.

When to use: Where outside approvals are likely or regulatory risk is present.

8. Material Adverse Change (MAC) Clause

Allows withdrawal or renegotiation if something major goes wrong in the business (loss of key customer, litigation, or regulatory change) between LOI and closing.

When to use: In longer deals or with volatile businesses.

9. Access and Inspection Rights

Gives the buyer the right to inspect premises, meet staff, or review assets before completion. This ensures there are no unpleasant surprises.

When to use: For businesses with large inventories, critical staff, or unique physical assets.

10. Standstill Agreement

Prevents a buyer (often a competitor or private equity firm) from buying shares, making hostile moves, or contacting stakeholders directly during the negotiation.

When to use: If you want to keep tight control and avoid side deals or takeovers.

Why These Clauses Matter

Optional clauses let you customise your LOI to the risks, dynamics, and needs of your deal. Used wisely, they lock in trust, align behaviour, and keep the process moving. Every extra clause should have a purpose: speed, safety, or leverage.

Conclusion: Make Your LOI Work for You

The LOI is not just a formality. For business owners, it is a growth lever and a risk shield. Take the time to get it right—address valuation, payment, financing, working capital, inventory, add-backs, seller promises, and any extras your deal needs. This is how you move quickly, avoid disputes, and keep control from first handshake to final sign-off.

Ready to take the next step?
Book your Clarity Call with Legal That Works—let’s structure your ambition into a deal that gets done, on your terms.