The situation
A packaging company in Gujarat wants to buy a competitor in Maharashtra. The two promoters have met three times, toured each other's plants and agreed a number over dinner. The buyer's finance director now wants to "put something on paper" before spending money on lawyers and accountants. The seller's son, who has recently joined the business, asks whether this paper commits his father to anything.
The answer is: mostly no, but it matters a great deal. What goes into this first document shapes the diligence, the negotiation and the final agreement. Terms left vague here tend to be argued over later, when the seller has less bargaining power because he has stopped talking to anyone else.
Letter of intent, term sheet, heads of terms
These names overlap and are used loosely in India.
- A letter of intent (LOI) is common in acquisitions. It is often written as a letter from buyer to seller setting out the proposed deal.
- A term sheet is more common in investments, such as a venture fund buying a minority stake. It is usually a table of terms.
- Heads of terms is the same idea in a more neutral form, often used in joint ventures and asset deals.
The format matters less than the content. All three set out the main commercial terms, say which clauses are binding, and describe what happens next.
Binding and non binding parts
Most of the document is non binding: either side can still walk away. A few clauses are usually binding:
- confidentiality, often by reference to the NDA already signed
- exclusivity, if agreed
- costs, saying each side pays its own
- governing law and disputes
Make sure the document says clearly which clauses are binding. If it does not, a court may look at the parties' conduct to decide, and that uncertainty helps nobody.
What to agree first
Price and how it is measured
A headline number is not a price until you know what it includes. Agree whether the figure is an enterprise value (for the whole business, before debt and cash) or an equity value (what the shareholders receive). Most acquisitions are priced on a cash free, debt free basis with a normal level of working capital. If so, write down how debt, cash and working capital will be defined, even roughly. For the packaging deal, a difference in how creditors and advances from customers are treated can move the final payment by more than the seller expects.
Structure
Will the buyer acquire the shares of the company, or the business and assets? A share purchase takes over the company with its history, good and bad. An asset or business transfer lets the buyer choose what to take, but contracts, licences and employees may need to be moved individually. Tax, stamp duty and approvals differ between the two. Settle the structure early because it changes the diligence, the documents and the seller's after tax proceeds. Both sides should get advice from their CA on the tax effect before signing.
Timing of payment
Is the full price paid at closing, or is part held back, paid later, or linked to future performance (an earn out)? Deferred and contingent payments shift risk to the seller. If they are part of the deal, agree the broad mechanism now: what period, what measure, and who controls the business during that period.
Conditions to closing
List what has to happen before the deal can close: satisfactory diligence, board and shareholder approvals, lender consents, and regulatory approvals. A large combination may need approval from the Competition Commission of India, and investment from outside India must follow FEMA rules on pricing and reporting. Your lawyer can confirm whether either applies. Naming conditions early avoids surprises about timeline.
Exclusivity
The buyer will ask the seller to stop talking to other parties for a period, often sixty to ninety days. This is the seller's main concession. Keep the period realistic, tie it to progress (for example, it ends if diligence has not started within a set number of days), and make sure it ends automatically.
People
If the promoter or key managers are expected to stay, say so, with an expected period and role. A seller who assumed he would leave at closing and a buyer who assumed three years of transition are not yet agreed on a deal.
What can wait
Detailed warranties, indemnity caps and limits, the full disclosure process, and precise completion mechanics belong in the share purchase agreement or asset purchase agreement. Trying to negotiate all of them at the letter stage slows things down. A sentence saying the definitive agreement will contain warranties and indemnities customary for a transaction of this kind is enough for now. If the buyer already has a specific demand, such as a special indemnity for a known tax dispute, raise it now.
Limits
A well drafted LOI does not guarantee a deal. Diligence can change the price, and either side can walk away. Equally, a seller who signs a loose LOI with long exclusivity can find himself negotiating the real terms with no alternatives. The protection is in being specific about price mechanics, structure and exclusivity, and in getting your own lawyer to review the draft.
Where Synerger helps
Synerger includes templates for an LOI for equity acquisition, an LOI for asset acquisition, heads of terms and an exclusivity agreement, along with deal structure templates and valuation models your advisers can use to test different prices and structures. Scenario planning in the deal pipeline lets the buyer compare offers side by side. The templates are starting points. The terms you agree and the advice you rely on come from your own CA and lawyer.
A short checklist
- Enterprise or equity value stated, with the basis for debt, cash and working capital
- Share purchase or asset transfer decided, with tax advice on each
- Payment timing and any deferred or contingent amounts described
- Closing conditions listed, including regulatory approvals to check
- Exclusivity period short, tied to progress, ending automatically
- Expectations for promoters and key people written down
- Binding clauses named explicitly
- Your own lawyer has reviewed the draft
For help with pricing and structure before you sign, see our mergers and acquisitions practice.