What is a Letter of Intent?
A Letter of Intent (LOI) is a statement of understanding between two parties.
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. 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.
Who should use a Letter of Intent?
You can use a Letter of Intent under any circumstance in which two parties agree to move forward in good faith before finalizing an arrangement.
For instance, a business owner with an interested buyer might agree to an LOI during the early negotiations for the sale of the business. In conjunction with a Confidentiality Agreement, an LOI creates the framework for negotiations, including the disclosure of confidential information relating to the business. This allows the buyer to assess the viability of the purchase in a way which also protects the interests of the seller.
Is a Letter of Intent binding?
A Letter of Intent isn’t usually a legally binding document. It must be carefully drafted so it doesn’t create legally binding obligations. This document outlines a proposed understanding between two or more parties who wish to finalize the details of a future transaction.
The purpose of a Letter of Intent is only to help finalize the details of a future agreement. The parties should not rely on the Letter of Intent as binding on the other party as it is only a tool to facilitate further discussion. Bankers and investors can also use a Letter of Intent in discussions as evidence of serious negotiation.
Keep in mind that just because something is in an LOI doesn’t mean that the agreement is final. Either party can still choose to end negotiations at any time with no legal ramifications.
How long should a Letter of Intent be?
The exact length of your Letter of Intent changes depending on its intended purpose. Typically, a Letter of Intent should be about a page long and no more than two pages. An LOI doesn’t need to be long because it only summarizes the initial terms of an agreement. If both parties decide to move forward with the deal, there will be more comprehensive details of terms and conditions in their final contract, such as a General Partnership Agreement.
There are a number of reasons you might need to create a Letter of Intent, such as Transactions involving negotiation, fact-finding, or disclosure of information. In business or real estate transactions, an LOI provides an overview of the purchase details in advance of a binding agreement. The parties can outline any pre-conditions which will apply to the transaction, allowing them to clarify any defects or problems up front, saving time later.
Any circumstance under which you enter an agreement in good faith before finalizing the details can benefit from an LOI. Also, people like bankers or investors who are involved in negotiations can use an LOI to create a record of important discussions.
You can use a letter of intent for many circumstances other than the ones listed above, including:
- Entering graduate school
- Applying for a new job
- Homeschooling your children
- Purchasing a business
- Contracting services
- Entering into an entrepreneurship
- Joint ventures
- Athlete scholarship
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