Letter of Intent
A Letter of Intent is also known as a:
- Memorandum of Understanding
- Letter of Interest
What is a Letter of Intent?
A Letter of Intent (LOI) is a statement of understanding between two parties. It is non-binding, meaning that the parties are not legally required to follow through with the terms of the agreement.
The LOI acts as a foundation for a definitive agreement. By agreeing to the Letter of Intent, both parties intend to continue negotiations in good faith.
If you are looking to purchase assets or shares from another business, you can use a Purchase of Business Agreement.
What is Good Faith?
When two parties agree to good faith obligations, it means that they are both sincere in their intent to act and carry out their promise.
What Can a Letter of Intent be Used For?
While a Letter of Intent can be used for many purposes, it is commonly used prior to business transactions involving the purchase or sale of shares or assets from one party to another.
An LOI can also be used to convey interest in leasing or buying a property.
Who Should Use a Letter of Intent?
Either party involved in a business transaction can create a Letter of Intent to set out terms for a deal.
For instance, an interested buyer might submit an LOI to a seller as a formal way to make an offer on a business. At that point, the seller could review the terms in the letter and decide if they wish to move forward with the purchase or if there are negotiations needed beforehand.
If the seller agrees to the content in the LOI, they would give their approval to move into the next stage of the transaction.
What is Included in an LOI?
In a Letter of Intent for a business transaction, the letter contains terms for the purchase, including:
- Buyer and seller information
- Description of the transaction (land, location, type, etc.)
- Purchase price
Other common clauses might include:
- Confidentiality or exclusivity clauses
- Any contingencies for the deal, such as passing the due diligence process
Why Should I Use a Letter of Intent?
In business or real estate transactions, the purpose of an LOI is to provide an overview of the purchase details in advance of a binding agreement. It allows the seller to evaluate their options before agreeing to the terms with a buyer and saves on the costs involved with negotiation and due diligence.