What is a Letter of Intent (LOI)?
A Letter of Intent (or LOI) is a short, non-binding contract that precedes a binding agreement, such as a share purchase agreement or asset Purchase Agreement (definitive agreements). While a Letter of Intent is non-binding, it may have some binding provisions and clauses, such as non-disclosure, exclusivity, and governing law.
What should be included in a Letter of Intent?
The specific details in your Letter of intent will be unique to the deal you are trying to put together. However, every robust letter of intent will follow the same general framework. As a rule of thumb, you should ensure your letters of intent include the below.
- The names of all parties. It should be clear who is on either side of the transaction or agreement. If it is a business transaction, you may also wish to include the name of any principal shareholder.
- The purchase price. Assuming this isn’t still part of the negotiations, ensure your Letter of Intent includes the agreed purchase price, plus any conditions.
- Definitive agreement timeline. You should outline a timeframe at which point a definitive agreement should be completed. This creates a sense of urgency to complete a deal and protects either party in the event an agreement is not or cannot be reached.
- Conditions relating to the completion of the transaction. Such conditions may include things like subject to due diligence procedures and financial audits proving satisfactory. Essentially, this should outline everything else that needs to be done before you finalize a deal.
- Confidentiality clause. It is a good idea to also sign a Non-Disclosure Agreement alongside your letter of intent. You can then refer to its existence in your Letter of Intent without including lengthy confidentiality clauses.
- Exclusivity clause. Including an exclusivity clause shows trust between all parties and gives peace of mind that neither is negotiating with anyone else about the same or a similar deal.
- Dispute resolution. Outline how any disputes relating to the Letter of Intent should be resolved.
- Governing law. Clarify under which jurisdiction the Letter of Intent shall be governed.
When should you use a Letter of Intent?
You can use a Letter of Intent when you have a preliminary agreement in place with another party regarding a potential purchase or another business transaction. Although a letter of intent is non-binding, it's a good indication two parties are working towards a deal in good faith, and that one (or both) is not simply wasting the other's time.
Why use a Letter of Intent?
A Letter of Intent is an excellent document to use if you and the other party agree on some terms, but negotiation continues around others. You can use your Letter of Intent to outline the terms that have been agreed, meaning they're not getting in the way or clouding discussions as you seek to finalize your agreement. You may even use a Letter of Intent to announce the nature of a deal, like a joint venture or merger.
In addition, using a Letter of Intent can deliver several benefits to both the buyer and the seller.
For the seller, using a Letter of Intent will:
- Help you ensure the buyer is serious and isn’t wasting your time
- Help you plan purchases of stock or other business spending if you know you have incoming revenue
- Avoid you having to spend time negotiating with other parties or selling at a lower price
For the buyer, using a Letter of Intent will:
- Prevent you from spending time on due diligence processes when the other party isn't serious about selling
- Stop the seller using you as an “outrider” to attract interest from other parties who may be willing to pay more
- Potentially help you secure finance from a lender to fund the sale
- Ensure you can buy at the price agreed and not potentially have to spend more money later
- Plan your business activities if you will be selling products to your own customers
Overall, a Letter of Intent should protect all parties involved in the proposed transaction and be a robust foundation for any finalized agreement.
Where and how to use a Letter of Intent?
You can use a Letter of Intent in various scenarios, including but not limited to:
- The acquisition of a business or a merger between two businesses
- The purchasing of a business' stocks
- The purchasing of a physical product or service
- A partnership between two or more business entities
There are other scenarios in which you may use a different Letter of Intent, such as a job offer.
Contractbook’s Letter of Intent template is designed for a business acquisition that is to be paid for with a combination of cash and the buyer's stock. However, as well as tailoring this Letter of Intent template on that basis, when you create a Contractbook account, you can change as much of our templates as you like.
Sign up to Contractbook here.