From LOI to SPA: the closing process in a company sale

# From LOI to SPA: the closing process in a company sale

When an owner reaches an agreement in principle to sell or buy a company, the conversation is not yet a contract. Between the initial handshake and the signature before a notary there is a legal route that puts the deal in order, allocates risk and locks down what has been agreed. That route starts with the letter of intent, the LOI, and ends in the final sale contract, the Share Purchase Agreement or SPA.

Understanding this process is not a luxury for lawyers: it is the difference between a deal that closes safely and one that falls apart at the last moment or drags litigation behind it for years. This guide explains, step by step, how you get from the LOI to the SPA, which clauses are negotiated hardest and which tax implications you need to bear in mind if you run an industrial SME in Spain.

What a letter of intent (LOI) is and what it is for

The letter of intent is the first formal document in a company sale. It sets out the essential terms the parties want to negotiate on: the indicative price, the structure of the deal (a share purchase or an asset purchase), the expected timetable and the conditions under which the negotiation will run.

It has three functions. First, it sets expectations: it puts in writing what is being bought, for how much and on what assumptions, which avoids misunderstandings when the process gets complicated. Second, it opens up the information: from the LOI onwards the due diligence phase begins, in which the buyer examines the inner workings of the company. And third, it sets rules of play that are binding, even though the bulk of the document is not.

That last point causes the most confusion. As a general rule the letter of intent is not binding as to price or as to any obligation to complete: neither party is tied to signing the final contract simply because it has signed the LOI. But it does contain clauses that bind from the first minute.

The binding clauses in an LOI

Even where the body of the letter is declaratory, three blocks have full legal effect:

• Confidentiality. The seller is about to hand over sensitive information — contracts, accounts, customer base — and needs assurance that it will not leak or be used for other purposes. This obligation survives even if the deal never completes.
• Exclusivity. The buyer invests time and money in due diligence, so it asks for a period during which the seller cannot negotiate with other candidates. It usually runs between 60 and 90 days, with extensions possible.
• Costs and governing law. Who bears adviser fees if the deal breaks down and which jurisdiction settles disputes.

It pays to be precise about which parts of the document bind and which do not. An ambiguous LOI can end up read by a court as an enforceable preliminary contract, leaving the party that walks away from the negotiation liable to compensate the other. That is why the line between what is binding and what is indicative has to be set out in black and white.

Arras: when a deposit comes into play and what it means

In some deals, particularly sales of asset-holding companies or where the buyer wants to secure its position, a sum is paid on account as arras, the deposit of Spanish civil law. Article 1454 of the Código Civil (the Spanish Civil Code) covers what are known as arras penitenciales: "Where a deposit or earnest money has been given in a contract of sale, the contract may be rescinded, the buyer accepting the loss of that deposit or the seller returning it twice over" (Real Decreto of 24 July 1889, BOE).

The practical consequence matters: where the deposit is penitencial, either party can withdraw at a fixed cost, forfeiting it or returning it twice over. But the case law of the Tribunal Supremo (the Spanish Supreme Court) has consistently held that this character must be expressly agreed; failing that, the deposit is treated as confirmatorio, that is, as an advance on the price that does not allow a party to walk away freely. That apparently minor distinction completely changes who carries the risk if the deal goes wrong.

Due diligence: the bridge between the LOI and the SPA

Once the letter of intent is signed, the review starts. Due diligence is the detailed examination of the target company in legal, tax, employment and financial terms and, increasingly, in environmental and technological ones too. Its purpose is twofold: to confirm that what the buyer thought it was buying matches reality, and to detect contingencies that may adjust the price or call for additional guarantees.

The findings of this phase feed straight into the final contract. A latent tax liability, an open employment claim or a contract with a change-of-control clause will show up in the SPA as representations, warranties or price adjustments. That is why preparing the documentation properly is one of the levers with the most impact on the final outcome. If you want to go deeper, we cover it in our guide to what due diligence is and how to prepare for it.

The SPA: the final sale contract

The Share Purchase Agreement is the document that closes the deal and transfers ownership. Unlike the LOI, the SPA is fully binding and tends to be a long, heavily negotiated contract. These are its essential blocks.

Subject matter and price

It defines exactly what is transferred — normally the shares — and how the price is determined. The price is rarely a closed figure: the norm is a base price subject to adjustment for net debt and working capital at the closing date. This is where mechanisms such as the locked box (a price fixed at a past date) or completion accounts (an adjustment after closing) come in.

Representations and warranties (*reps & warranties*)

This is the heart of the SPA. The seller makes a series of statements about the condition of the company: that the accounts are true, that there is no hidden litigation, that the assets are free of charges, that employment and tax rules are complied with. If any of these statements turns out to be false, the buyer can claim compensation. This section is negotiated hard because it defines exactly which risks each party takes on.

The indemnity regime

It sets the limits and time bars on the seller's liability: minimum amounts before a claim can be brought (de minimis), a basket, a cap and the duration of the warranties. Part of the price is often held in an escrow account for a period to cover possible contingencies.

Conditions precedent and closing

Between signing the SPA (signing) and the actual transfer (closing) there can be a period in which certain conditions have to be met: merger control clearances, third-party consents or the buyer's own financing. Only when they are met is the deal executed as a public deed before a notary and the price paid.

Negotiating this whole block is where a deal is won or lost. We support business owners through this decisive phase with our deal negotiation and closing service, where the aim is to protect your interests without derailing the transaction.

Tax at closing: what changes depending on who sells

The last factor that shapes the closing — and one worth planning from the LOI onwards — is the tax treatment of the gain. The tax bill on a sale depends on whether the seller is an individual or a holding company.

If the seller is an individual, the capital gain is taxed in the savings income base of Spanish personal income tax (IRPF), at progressive rates that in 2025 run from 19% on the first €6,000 up to 30% on gains above €300,000, following the increase in the top band brought in by Ley 7/2024 (AEAT, 2025); you can check the rates in force on the site of the Spanish Tax Agency.

If the sale is made by a holding company that meets the requirements of article 21 of Ley 27/2014, the Impuesto sobre Sociedades (Spanish corporate income tax) act — a holding of at least 5% held without interruption for the previous year — the gain can qualify for a 95% exemption, so that only the remaining 5% is taxed, as non-deductible management costs (BOE, 2014); the consolidated text is available at the BOE. The difference in effective taxation between one route and the other is considerable, which is why the corporate structure has to be settled long before anyone sits down to sign. That planning is best done alongside the valuation: knowing what your company is worth under the different valuation methods lets you anticipate the base on which the gain will be calculated.

A realistic timetable for a deal

One of the commonest mistakes among owners facing their first sale is to underestimate the time it takes. An orderly company sale rarely closes in less than six months, and six to twelve is the norm, depending on the size, the complexity and the number of parties involved.

The typical route has a clear sequence. The first weeks go on preliminary conversations and on signing a confidentiality agreement. From there the letter of intent is negotiated and signed, which opens the exclusivity window. With the LOI signed, due diligence starts, and it usually takes between one and three months depending on how deep the review goes. In parallel, the advisers begin drafting and negotiating the SPA, feeding the findings of the review into the representations and warranties. Finally comes the signature of the contract and, once the conditions precedent are met, closing before a notary.

Understanding this rhythm helps to manage expectations and, above all, to keep the business running during the process. A fall in the company's performance while the deal is being negotiated is one of the arguments buyers most often use to renegotiate the price downwards.

Why do deals collapse in the final stretch?

Not every sale that reaches the SPA gets signed. Knowing the most frequent causes of a breakdown helps to anticipate them. The first is the appearance of significant contingencies in due diligence: an unprovisioned tax liability, a serious employment claim or a key contract with a change-of-control clause that lets the customer end the relationship after the sale. Where the finding is serious, it either adjusts the price or makes the buyer walk away.

The second cause is the distance between the parties on representations and warranties. The seller wants to limit its future liability as far as possible; the buyer wants cover against everything it has not been able to verify. If the positions on caps, time bars and minimum amounts do not converge, the deal stalls.

The third, and often the most underestimated, is tax. Where the structure of the sale has not been planned in advance, the seller can find out too late that the tax bill substantially reduces the net amount it expected to receive. Planning the deal from the letter of intent stage — and not afterwards — is what avoids these surprises. For an overview of the whole sale process, see our complete guide to selling a company in Spain.

Frequently asked questions

Is a letter of intent compulsory before the SPA?

It is not compulsory, but it is strongly advisable. The LOI puts the negotiation in order, gives access to due diligence and sets confidentiality and exclusivity rules that protect both parties before they spend money on the final contract.

Does a letter of intent oblige you to complete the deal?

As a general rule, no. The price and the obligation to complete are usually agreed as non-binding. The confidentiality, exclusivity and cost-sharing clauses do bind, however, and a badly drafted LOI can be read as an enforceable preliminary contract.

What is the difference between arras confirmatorias and arras penitenciales?

Arras penitenciales allow a party to withdraw from the contract by forfeiting the deposit (the buyer) or returning it twice over (the seller), under article 1454 of the Código Civil. Arras confirmatorias are an advance on the price and do not allow a party to withdraw. The penitencial character has to be expressly agreed.

What are the representations and warranties in an SPA?

They are the statements the seller makes about the real condition of the company (true accounts, no litigation, regulatory compliance). If they turn out to be false, the buyer can claim compensation within the limits and time bars agreed in the contract.

Conclusion

Going from the LOI to the SPA is far more than paperwork: it is the process that turns an intention into a secure transfer of ownership. Each phase — letter of intent, due diligence, final contract and closing — has a specific job to do in ordering, verifying and protecting the deal.

For an owner selling the company of a lifetime, or for an SME growing by acquiring competitors — if that is your case, our guide to how to buy a company and the acquisition process is worth reading — the value of doing it properly is measured in the calm of a closing with no surprises. At Tecnocim Innova we support industrial companies along the whole route of a company sale, from the initial valuation to signature. If you are considering a deal, we can help you structure it safely through our M&A and business transfers service.