A Letter of Intent is a written document that outlines a preliminary agreement between two parties regarding the terms of a potential purchase or other transaction. Think of it as a road map as to how the negotiation and deal will proceed. The two parties can settle on certain terms while agreeing to continue to negotiate the other terms and details of the transaction before actually signing a purchase agreement.
What Should be Included in a Letter of Intent?
Who are the Parties?
Identify who is the seller (the current owner) and the buyer (the potential new owner).
What is the Transaction?
Describe in detail what is being purchased, including any agreements on what will be included or excluded in the transaction the parties will be negotiating.
What are the Terms?
Include any terms that have been agreed upon, such as purchase price or price adjustments. If the seller has agreed to exclusivity (i.e. not to negotiate with other parties), that should be included as well.
What about the Letter of Intent Itself?
The agreement should explicitly state whether it is binding or non-binding – don’t leave this open for a court to determine. Also include when it (and negotiations) will end and which state’s law will govern it.
Are there any Conditions?
The parties can include certain conditions that must occur before a final agreement will be signed, such as:
- the buyer securing financing
- the buyer completing due diligence
- the buyer successfully selling his or her home
- an inspection of the property
regulatory or other required approvals
Here are some other terms that may also be included:
- Confidentiality – the agreement and any information learned will remain confidential
- Covenants – things each party must do while negotiations are taking place
- Special Terms – any special terms that the parties agree will be in the purchase agreement, such as leaving certain items of furniture or hiring certain employees
As a reference, a Letter of Intent is known by other names:
- Intent to Purchase Letter
- LOI
- Letter of Interest
- Term Sheet
- Memorandum of Understanding
- MOU
- Assurance Letter
- Framework Letter
When Should I Use a Letter of Intent?
This agreement is most often used in transactions involving a purchase. Sometimes two parties will know that they want to do a business deal together, but they aren’t ready to sign an actual agreement. For example, they may agree that one party will sell his or her business for a certain price, but they do not yet agree on who will take on certain liabilities of the business. The parties can sign this document to show each other a good faith intention to work out a deal. It can also help parties get on the same page as to what they expect from the purchase.
Here is a list of some possible LOI relationships:
| SELLER | BUYER |
|---|---|
| Owner of a business | Corporation that wants to expand |
| Real estate flipper | Newly married couple |
| Pig farmer | Restaurant with an all-bacon menu |
| Car owner | Newly-licensed driver |
Why You Should Use a Letter of Intent
Without this document, you might miss out on a number of purchase or sale opportunities. Sometimes banks or lenders will require some kind of proof of a deal before they will promise to grant to financing. Or if you are still negotiating certain terms of the deal, either side may question the other party’s commitment to actually getting the deal done and walk away.
Here is some of the suffering using this document might help prevent:
| SELLER | PURCHASER |
|---|---|
| Loss of Time | Loss of Time |
| Loss of Money | Loss of Money |
| Mental Anguish | Mental Anguish |