Letter of Intent (LOI): Overview, definition and example
A Letter of Intent (LOI) is a document that outlines the preliminary terms and agreements between two or more parties before entering into a final contract. It serves as a roadmap for the negotiation process, detailing the intent to formalize a deal, the main terms of the agreement, and key responsibilities, but it does not usually create a legally binding obligation to complete the deal.
Why is a Letter of Intent important?
A Letter of Intent is important because it provides a framework for the deal, helping both parties understand the key points of agreement before they proceed with formal negotiations. It sets expectations, clarifies objectives, and can prevent misunderstandings down the road. While it may not be legally binding, it often lays the groundwork for a more detailed and enforceable contract.
For businesses, an LOI can demonstrate a commitment to a potential deal without finalizing all details, and it can be used to show the seriousness of the negotiations. It can also allow for due diligence to be conducted before finalizing the terms.
Understanding a Letter of Intent through an example
Imagine a software company, TechInnovate, planning to acquire a smaller startup, AppDev Solutions. Before drafting a full acquisition agreement, TechInnovate and AppDev Solutions exchange a Letter of Intent. The LOI outlines the purchase price, basic terms, and timeline for completing the deal. It also includes contingencies such as an agreement that the purchase will be subject to due diligence and further negotiation of specific terms.
In another case, a business supplier might send an LOI to a retailer to outline the intent to establish a distribution agreement. The LOI could specify the scope of the agreement, the proposed pricing, and delivery terms, but it wouldn’t be binding until the retailer formally accepts the final contract.
An example of a Letter of Intent clause
Here’s how a typical LOI might be phrased:
"This Letter of Intent serves as an outline for the proposed acquisition of AppDev Solutions by TechInnovate. Both parties agree to proceed with the due diligence process, and upon completion, a formal purchase agreement will be drafted based on the terms outlined herein. This LOI does not constitute a binding obligation to complete the acquisition."
Conclusion
A Letter of Intent is a useful tool in business transactions to establish a preliminary understanding between parties before committing to a full agreement. While it is not usually legally binding, it provides clarity on key terms and intentions and sets the stage for more formal, binding negotiations. For businesses, it’s a way to ensure that both sides are aligned before investing time and resources into a final agreement.
This article contains general legal information and does not contain legal advice. Cobrief is not a law firm or a substitute for an attorney or law firm. The law is complex and changes often. For legal advice, please ask a lawyer.