What Is a Letter of Intent ?
A letter of intent (LOI) is an initial, non-binding agreement between the parties in a proposed business deal. The LOI establishes the aspects of the deal the parties agree on, shows the parties are committed to making a final deal, and clears the way for a later, binding agreement called a definitive agreement.
An LOI is a starting point between two parties that are negotiating a business transaction, such as a sale or purchase, a merger, or a joint venture. A letter of intent clarifies the intentions of those involved in the deal and the major provisions that still must be agreed upon.
Though some of the provisions of the letter may be binding, the overall letter is not intended to be binding to both parties. The letter should state which parts of the agreement are binding while making it clear the letter is not a definitive agreement. If one of the parties fails to fulfill a binding part of the agreement, they may be responsible for damages to the other party.
Components of LOI
The exact structure of a letter of intent depends on the specific type of business deal involved, but it often includes several sections that outline the proposed deal in at least basic terms.
The introduction of an LOI will include a statement of the purpose of the document. It also states the date upon which the document becomes effective. Various terms used in the document might also be identified and defined here.
The buyer and seller or the parties in the merger or joint venture are described completely so there’s no possibility of confusion.
This section includes a general description of the transaction, including the type of business deal that will be entered into. It can also include a purchase price, although this point may still be under negotiation. The parties may want to set some deadlines to ensure the process moves along reasonably quickly while still allowing for the possibility of extensions if both parties agree.
A contingency is something that must happen before something else happens. Common contingencies in business deals include the securing of financing by the buyer and the approval of boards of directors and/or a government agency. The parties may also agree on which state’s laws will cover the final agreement between them.
A deadline should be set for this process used by the buyer and—more often in the case of a joint venture—sometimes the seller to go over the deal with a fine-toothed comb. The process involves checking records, verifying tax and legal documents, searching for unknown liabilities or pending litigation, and asking lots of questions.
The LOI should state that all entities in a position to provide information during the due diligence process will cooperate in good faith.
The parties should select a closing date and include in the LOI language saying the parties agree to abandon the deal if it isn’t finalized by that day.
The parties should sign and date copies of the letter of intent after they have agreed to its terms, and all parties should receive a copy.
