What Is a Letter of Intent (LOI)? A letter of intent (LOI) is a document declaring the preliminary commitment of one party to do business with another. The letter outlines the chief terms of a prospective deal. Commonly used in major business transactions, LOIs are similar in content to term sheets. One major difference between the two, though, is that LOIs are presented in letter formats, while term sheets are listicle in nature.
Letter of Intent (LOI)
- A letter of intent is a document declaring the preliminary commitment of one party to do business with another.
- The letter outlines the chief terms of a prospective deal and is commonly used in business transactions.
- LOIs are useful when two parties are initially brought together to hammer out the broad strokes of a deal before resolving the finer points of a transaction.
- Terms included in an LOI are certain stipulations, requirements, timelines, and the parties involved.
- Many LOIs include non-disclosure agreements (NDAs) and no-solicitation provisions.
- Letters of intent are also used outside of the business world in any circumstance where two parties intend to work together or form a deal.
Understanding a Letter of Intent (LOI)
LOIs are useful when two parties are initially brought together to hammer out the broad strokes of a deal before the finer points of a transaction are resolved. LOIs often include provisions stating that a deal may only go through if financing has been secured by one or both parties, or that a deal may be squashed if papers are not signed by a certain date.https://9c6b9124a5e6404f3847ef912d346f5f.safeframe.googlesyndication.com/safeframe/1-0-38/html/container.html
Since LOIs typically discuss potential points of deals that have yet to be cemented, they are almost universally intended to be non-binding.
LOIs can be iterative in nature. One party may present an LOI, to which the other party may either counter with a tweaked version of that LOI or draft a new document altogether. Ideally, by the time both parties come together to formalize a deal, there will be no surprises on either side of the table.https://9c6b9124a5e6404f3847ef912d346f5f.safeframe.googlesyndication.com/safeframe/1-0-38/html/container.html
Many LOIs include non-disclosure agreements (NDAs), which contractually stipulate the components of a deal both parties agree to keep confidential, and which details may be shared publicly. Many LOIs also feature no-solicitation provisions, which forbid one party from poaching the other party’s employees.
A letter of intent is usually drafted and signed while negotiations between parties are ongoing so that the final terms of a deal might vary from what was agreed upon in the letter of intent. Due diligence is conducted by both parties before doing business. It is a prudent business practice to complete due diligence before signing a letter of intent.
Purpose of a Letter of Intent (LOI)
Letters of intent may be used by different parties for many purposes. Parties can use an LOI to outline some of the basic, fundamental terms of an agreement before they negotiate and finalize all the fine points and details. Furthermore, the LOI may be used to signal that two parties are negotiating a deal such as a merger or joint venture (JV).