What Is a Letter of Intent for Business?
While typically non-binding, a letter of intent outlines the main points of a potential deal and the goals of each party. It’s an initial step towards future negotiations.
What Is a Letter of Intent?
A letter of intent (LOI) is a type of document signed between two or more parties. It details a preliminary agreement that paves the way for a more formal one. It is a blueprint that outlines the primary terms and intentions of the parties involved in negotiating a deal.
Formal contracts can take time from processing legal papers to finalizing complicated details. An LOI gets the process started by laying out the main points of the deal.
What Is the Purpose and Application of a Letter of Intent?
Purpose of an LOI
The purpose behind writing a business LOI can vary depending on each situation. Here are a few of the most common reasons why many businesses choose to sign one:
Initiating Negotiations: An LOI is the first step to kick-start negotiations between parties. It clarifies the key points that they need to discuss later.
Providing Protection: While it’s not necessarily legally binding, an LOI can protect all the parties involved. It sets conditions the involved parties must meet before proceeding with the deal.
Building Trust: A letter of intent establishes mutual understanding and shared vision between the parties involved in a deal. Consequently, it encourages mutual trust.
Establishing Commitment: This essential document also proves the commitment of all parties to work toward a final agreement.
Setting Expectations: An LOI helps manage expectations by clarifying intentions, announcing the nature of the deal, setting a timeline for negotiations, and emphasizing any other conditions that require addressing.
Speeding Up the Process: Instead of waiting to finalize a formal contract, an LOI allows the parties to start working toward their goal and ensures they’re all on the same page.
Applications of an LOI
An LOI is usually created by a legal team. Take a look at some of the applications for a letter of intent:
Mergers and Acquisitions (M&A): In merger and acquisition transactions, an LOI outlines the primary terms and conditions of a proposed deal. Typically, it should include details like the purchase price, transaction structure, assets and liabilities, etc.
Partnership Agreements: When forming partnerships or joint ventures, LOIs help clarify the roles, responsibilities, and contributions of each party. They also include terms such as profit and loss sharing arrangements, duration, confidentiality obligations, etc.
Investment and Financing: New businesses and startups that need funds usually use an LOI to outline the terms, including investment type, offered amount, valuation, and equity stake.
Real Estate Transactions: Real estate transaction agreements could also benefit from an LOI. That’s because it specifies the basic terms of the sale or lease. This may include lease duration, purchase price, or any other details.
Licensing Agreements: Even in licensing agreements, an LOI can be beneficial. It pinpoints the scope of the license, royalty rates, and any exclusivity deals.
What is Included in a Letter of Intent?
Depending on the nature of the transaction and the parties involved, the outline of an LOI might change. Yet, a letter of intent sample for a business almost always includes the following:
Introduction: A typical LOI begins with an introduction that addresses the parties involved and provides a general context for the agreement. It may also include the date and any other reference numbers or identifiers.
Proposal: This section briefly discusses the proposed transaction and the intent of the parties to enter a formal agreement.
The Non-Binding Nature Declaration: Although the LOI isn’t legally binding, mentioning that in the body helps clear any potential confusion or disputes.
Terms and Conditions: The main body of the LOI should also contain the key terms and conditions of the proposed agreement. This part can include details like timelines, pricing, payment terms, etc.
Confidentiality Clauses: An LOI might contain exclusivity and confidentiality clauses when applicable. The main goal of such a part is to protect sensitive information and prevent side negotiations with other potential partners for a specific period.
Due Diligence: When applicable, the LOI may include a due diligence part. It outlines the process during which each party can evaluate the other regarding financial standings, assets, etc.
Binding Sections: For parts that are intended to be legally binding, like confidentiality or exclusivity, there should be a section stating so.
Upcoming Steps: This part states the expected steps to be taken in terms of negotiations. It helps set proper mutual expectations and facilitates further progress in future discussions.
Closing Date and Signature: The final section of the LOI typically involves a closing statement with the LOI’s expiration date. Then, it concludes with signature lines for each party.
Is a Letter of Intent Legally Binding?
Since it’s just a provisional agreement between parties, a letter of intent isn’t typically legally binding.
However, some sections may be legally binding. For example, an LOI may include provisions, such as confidentialities or exclusivities.
In cases of a conflict that requires legal involvement, the court considers many factors. This includes the presence of clear and definite terms, the industry customs, the expiration date of the agreement, etc.
That’s why it’s always crucial to carefully draft and review an LOI with an experienced attorney to ensure clarity when it comes to its binding nature.
Signing a Letter of Intent
The signing process is a critical step toward formalizing agreements between the involved parties. Some considerations to keep in mind during this stage:
Before signing the LOI
To ensure that the document accurately reflects the intentions and expectations of all parties, both sides should review it carefully. It isn’t a one-way proposition, it can involve several rounds of revision to address concerns and refine the terms.
The LOI is intended to provide protection for everyone involved in the agreement.
After Signing the LOI
After the LOI is signed, the period of due diligence begins. During this time, the parties begin reviewing all the financial records, legal documents, operational data, and other relevant information.
Then, they start to negotiate the official, legally binding agreements. This includes any adjustments based on unexpected findings from the due diligence process.
After finalizing the terms of the agreement and receiving approvals from stakeholders, the definitive agreements are signed. This marks the official commitment to the transaction and outlines the enforceable obligations of each party.
Can a Party Withdraw After Signing an LOI?
The non-binding nature of LOIs allows either party to withdraw from the agreement without facing legal penalties. Some of those agreements contain binding provisions, such as confidentiality, exclusivity, or non-disclosure clauses.
The letter of intent might become binding if one party has already begun fulfilling some of its provisions or made huge financial commitments.
Whether or not a certain party can withdraw is determined by the terms of the letter as well as its language. That’s why it’s essential to have your attorney review the LOI before signing it.
Final Thoughts
A letter of intent is a preliminary, non-binding document signed between parties involved in a business deal.
An LOI is important for initiating further negotiations, providing protection for all parties, establishing commitment, setting expectations, and building mutual trust.
It’s commonly used in mergers and acquisitions, partnership agreements, investment and financing deals, real estate transactions, licensing agreements, and much more.
It usually includes an introduction, proposal, declaration of a non-binding nature, key terms and conditions, confidentiality clauses, due diligence, binding obligations, and other sections depending on the purpose.
A letter of intent is generally not legally binding, but some provisions within it may be binding depending on the terms outlined in the document.
