Business deals can be extremely expensive, time-consuming, and comprised of a number of documents and steps. Legal documents need to be put in place to protect the parties involved, but what do you use to ensure each party understands the initial first steps in a business agreement? Letters of intent provide that understanding for a variety of business transactions. Are letters of intent necessary to a business transaction? How do you create one? What is the purpose of it?
What Is a Letter of Intent?
A letter of intent (LOI) explains the purpose and provides an understanding of a deal between parties. Also known as term sheets, letter of interest or memorandum of agreement or understanding, letters of intent are written letters that are not legally binding contracts. Either party can develop an LOI to spell out the details of the transaction. They can also decide to walk away from the agreement if they determine they are no longer interested in the transaction, or if it does not meet their requirements.
What Details are Included in Letters of Intent?
The LOI is considered a proposal, describing the specific details of a deal while allowing all parties involved to put their intentions in writing without the legal ramifications. The letter should include all the details the other party would need to know regarding the deal. Some of those details include:
- Buyer and seller information
- Purchase price
- Description of the deal
- Confidentiality or clauses
It's important to note that there are several types of LOIs, and each may require the same or additional details than those listed above.
What are Letters of Intent Used For?
There are several types of letters of intent. LOIs are typically used for business dealings and transactions that include:
- Purchasing or leasing real estate or commercial property
- Purchasing a business
- Purchasing property other than real estate such as a vehicle
- Merging a business or businesses
- Purchasing shares or assets
- Accepting an offer for a school or scholarship
- Accepting an offer for a job
Examples of Letters of Intent
Different LOIs are used for different purposes. Make sure you choose the correct LOI for your particular transaction.
Purchasing Real Estate, a Business or Other Types of Property
LOIs related to purchases property should include the name, title, date and address of the seller, as well as the buyer.
The LOI details an intent to purchase, naming the address for real estate, if you're purchasing the inventory or assets for a business LOI and a description of the property for other types of property.
The second paragraph should detail the above information again and the specifics of your purchase. It should also include if you will take on the debt if you're purchasing a business.
The third paragraph should detail your plans for attaining the property, including if you are paying in full or making payments.
The fourth paragraph should reference if the buyer expects that the seller will no longer market for other buyers for an allotted amount of time.
The fifth and most important paragraph should detail that the LOI is not a legally binding offer and all particulars will be explained in detail in the final agreement.
Accepting an Offer for a Scholarship
When accepting a scholarship, the LOI is typically sent to the place providing it from the student with both the student's and organization's names, addresses and dates and be directed to the main point of contact. It should detail the student's intent to accept, the type of scholarship that was offered, and what school it will be used at. If there are any additional details, including those involving the student's needs such as housing, they should be included as a request in the second paragraph.
When Is There a Need to Write a Letter of Intent?
Typically, letters of intent are drawn up when both parties agree they are interested in doing business together but need to work out the details or negotiate the deal, but they are not prepared to sign a legal contract. It gives all parties an opportunity to review the terms of the transaction before agreeing to the deal. Each party may sign the LOI as a sign of “good faith” with parties having an intention to do business together. It shows that the parties involved are serious about the deal.
Are Letters of Intent the Final Agreement?
Letters of intent are not the final agreement or contract. The LOI summaries the details and actions that are necessary to move to the final agreement. During this time, there may be changes, updates or disagreements with the LOI that need to be worked out to finalize the deal or even bring the LOI process to an end.
How to Write a Concise Letter of Intent
The key to writing a concise LOI is to first determine which version you need, depending on the business transaction you are involved in. From there, you can add the necessary details to the sections that are usually included in an LOI.
The greeting of the LOI should be formal, using the contact's last name and Mr. or Ms. or their professional title.
The body of the letter of intent is the area of the letter that gives full details about the transaction. The introductory paragraph should include a statement of purpose, brief descriptions, and a date, as well as identify those involved in the transaction and their role.
Terms and Conditions
This section provides a broad description of the deal that includes that type of transaction. This is also the area for the price, which is still in negotiation status, along with how you may pay for the item being sold. It may also be a good idea to include possible deadlines to ensure the transaction is moving forward. However, it's important to know that deadlines can be changed if it's agreed upon by both parties.
A contingency is what needs to happen before something else can occur. For example, in real estate, a buyer must have suitable financing before solidifying a deal. In this area, the seller should layout what their contingencies are for the buyer in order for the deal to be considered acceptable. The buyer will have the opportunity to dispute or negotiate the terms of the contingency during the LOI phase.
The due diligence area of a letter of intent stipulates all the necessary details to ensure everything is discussed and nothing surprising comes up later. During this process, usually records, as well as legal and tax documents, are reviewed and verified. Also, this is a good time to ask a lot of questions regarding the transaction. The party responsible for the LOI does not have to divulge full details of the deal, but they should provide the other party of a general plan.
While letters of intent are not legally binding agreements, there are some that include sub-agreements, also known as restrictive covenants. These are legally binding, and if one party does not follow the terms of a covenant, it can be detrimental to the other party. These covenants are not required, but you should look into them to determine if they are necessary.
A non-compete agreement may also be included in this area, and it prohibits one party, normally the seller, from entering into an agreement with a competitor of the buyer or another party. An NDA, also known as a nondisclosure or confidentiality agreement, can also be added to this section. It blocks one party from revealing details received during the LOI process to anyone else or as a retaliation against the other party. A non-solicitation agreement stops one party from soliciting or attempting to gain the employees or customers of the other party.
It's a good idea in this section to include a clause on exclusivity, stating that the deal is between the current parties involved. This can eliminate other parties being added or either party from dealing with additional buyers or sellers.
The final area of an LOI should clearly state that it is non-binding unless other sections specify otherwise. It should include a statement that both parties can walk away from the transaction if they choose to before the deal becomes a legal agreement.
Should an Attorney Review the Letter of Intent?
For the LOI, it may not be necessary to include an attorney in the process unless you're including binding covenants, mostly because the agreement is not legally binding. The important thing is to have all parties review the document until they have either agreed or decided to part ways. Have the LOI reviewed for grammatical errors to ensure it is as professional as possible.
Sample Letters of Intent
Letter of Intent to Purchase a Property
Games, Trains and More, Inc.
456 Cornerstone Street
Charlotte, NC 28262
December 15, 2018
1234 Varsity Lane
Charlotte, NC 28269
Dear Ms. Jackson,
Please accept this letter of intent as our interest to purchase your business Candy Galore, including all inventory and assets. The terms we are proposing are submitted as follows.
We are requesting to obtain Candy Galore and its facility at 1234 Varsity Lane, the company branding, including the logo and customer database. Additionally, we are requesting to obtain all the office equipment and inventory. We will not assume the current outstanding debt of $100,000 as part of the deal.
In exchange for the proposed terms, we would provide compensation of $250,000 that includes:
1. Deposit of $25,000 on execution of a purchase agreement
2. Additional $75,000 after 14-day transfer period
3. Balance paid monthly in equivalent payments the first four months after closing
Included in this letter of intent, we are requiring that any negotiations with or shopping for buyers for 60 days to give us time to complete due diligence and finalize the agreement. Additionally, we are requiring a nondisclosure agreement with the agreement that you will not disclose our intent to purchase until after the purchase agreement has been signed and executed by both parties.
If we are chosen as the prospective purchaser, the closing will be finalized with 45 days.
Letter of Intent to Apply for Grad School Admission
9333 Ready Avenue
Milwaukee, WI 53216
December 15, 2018
School of Business
4321 Compatible Way
Charlotte, NC 28262
Dear Ms. Smith,
This letter is to confirm my intent to accept the admission offer from Best University's Graduate School. I am thrilled to be a student in the program and pursuing my education further at Best University.
Please provide me with the necessary information to begin school, which includes housing, financial aid and enrollment. If you need to reach me for any additional details, please contact me at (414) 555-1396.
Thank you for the opportunity to attend Best University's Graduate School, and I look forward to beginning school in the spring.
Letter of Intent to Apply for Graduate School
123 Time Street
Milwaukee, WI 53223
December 15, 2018
Dr. Samantha Harris
School of Business
4545 Frank Street
Charlotte, NC 28269
Dear Dr. Harris,
This letter serves as my notice for my intent to apply for admission to the School of Business Graduate School program for the 2019-2020 school year. As a graduate from Best University and current employee of Big Business as a business manager, I have gained both the educational experience and on-the-job experience to prepare me for graduate school.
I hope you will consider my application for the graduate school program. If you have any questions, please contact me at (414) 555-1152.
Thank you for your time and consideration.
Letters of Intent can be the best way to discuss the details of a business deal without entering a legally binding agreement first. When all parties involved review details and negotiate terms before signing a legal agreement, it can make the process smoother and less costly. Just make sure you are using the correct LOI for your particular transaction and get your process started.