Letter of Intent for Business Transaction: A How-to Guide

Before settling on the final terms of an agreement, negotiating parties may choose to provide a written starting point, setting out a first offer and some general terms. This initial written document is called a letter of intent (sometimes also called a memorandum of agreement or a memorandum of understanding). A letter of intent sets out the basic terms of a proposed transaction, including price, asset description, limitations, and closing conditions.

Some simple transactions may not need a letter of intent. The parties can simply proceed with the creation of their final agreement. In other cases, however, a letter of intent can determine major issues and make clear to the parties why the transaction is a good (or bad) idea. It can allow parties to start negotiations from a consensus point, easing the way for the more formal contract. Moreover, outside investors or other third parties may want to see evidence that an agreement is in the works. This will allow for an early start to the drafting of loan documents or obtaining of necessary approvals.

If you follow the enclosed sample and guidelines, you will have a simple document that sets forth the basic terms of your proposed transaction, limiting misunderstandings and showing mutual commitment to the deal. In every way, this lays the foundation for a focused and productive period of negotiation between the parties, and for a final and satisfying agreement.

2. Dos & don’ts checklist

• A letter of intent describes a potential agreement between two or more parties. It is not a final agreement and should not sound like one. If the language of the document is too definite, the letter may be treated like a full and complete contract. Your language should show that you are proposing negotiations about a transaction but are not committing to the terms of the deal.
• A letter of intent should be short and simple. A lengthy and complicated letter may start to look more like a definitive agreement.
• Even if a letter of intent is drafted and signed, it does not guarantee that a final or definitive agreement will be reached. This is true even if both parties fulfill their obligations and work purposefully through negotiations. The letter is simply an agreement to begin the process, and not a promise of the closing of a transaction.
• Letters of intent are often non-binding, but should include language that states as much. If you want to make any provisions binding, those provisions should be clearly labeled.
• Do not create a letter of intent that includes too many details. Some courts have found letters of intent to be binding in spite of a specific statement to the contrary, if parties provided detailed and specific terms in those documents.
• If any of the following provisions will be in your letter of intent, they should be identified as binding:
  • Closing date;
  • Time frame for due diligence;
  • Confidentiality;
  • Non-competition; and
  • Exclusive dealing.
    If it’s clear that the parties want to make these provisions binding, they will be considered so and will be enforceable when the letter is signed.
  • Identity of the parties;
  • Subject matter;
  • Purchase price or other compensation;
  • Requirements to finalize the letter;
  • The final agreement(s);
  • Non-customary representations or warranties;
  • Covenants; and
  • Indemnification terms.

  3. Letter of intent for business transaction instructions

  The following provision-by-provision instructions will help you understand the terms of your letter of intent. The numbers and letters below (e.g., Section 1, Section 2(a), etc.) correspond to the provisions in the letter. Please review the entire document before starting your step-by-step process.

  • Introduction. Identifies the document as a letter of intent. Identify the parties and, if applicable, what type of organization(s) they are. Note that each party is given a name (e.g., “Party A”) that will be used throughout the letter.
    Briefly describe what each Party will do in the proposed transaction. This doesn’t have to be a stepby-step summary, but should provide enough information to make it clear the actions each Party will carry out. This section also clarifies that the letter is non-binding in its primary terms.
  • Section 1: Transaction. Describe the proposed transaction. This may be the sale of property or services, a real estate transaction, a joint venture, or some other activity. There is space for you to describe what each Party’s responsibilities will be in the Proposed Transaction.
  • Section 2: Consideration. In most agreements, each party is expected to do something. This obligation may be to perform a service, transfer ownership of property, or pay money. If the Proposed Transaction requires one Party to pay the other a certain amount, enter this amount in the space provided. You can add details about when this payment is due, and how that payment will be made (e.g., cash, promissory notes, etc.). If there is a different kind of exchange, describe it in this space.
  • (Optional) Section 3: Timing. If the Proposed Transaction involves the purchase or sale of a piece of property, you may want to set a closing date, at which point the property is will be transferred. Enter the date of closing on which the Proposed Transaction will close. If you remove this section, correct the section numbers and the references in the document.
  • Section 4: Contingencies. A contingency is something that must happen before something else can happen. In this case, the contingencies are the things that must happen before the Parties will become obliged to go through with the Proposed Transaction. More specifically, the following things must occur:
    • 4(a): The Parties sign one or more final agreements. Enter the state’s laws you want to govern those agreements.
    • 4(b): Any needed permissions have been received (e.g. government permits, the consent of each Party’s board of directors, etc.)
    • 4(c) Each Party has completed its due diligence within a certain time. “Due diligence” means an investigation into any materials or information that may be relevant to the Proposed Transaction. If the Parties are entering into a joint venture, they may each want to investigate each other’s business. If the transaction is a sale of assets, it may only be the buyer who is reviewing the other Party’s business. Enter the end date by which the Parties must complete their due diligence. This date is called the “Due Diligence Completion Date.” If there are any additional contingencies you want to add, you can feel free to do so here. For example, if the Proposed Transaction is for the sale or purchase of real estate, there may be a requirement that the seller provide evidence of clear title to that property. Make sure to spell out all relevant contingencies so neither Party is taken by surprise during negotiations about the Final Agreements.
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    This article is for informational purposes. This content is not legal advice, it is the expression of the author and has not been evaluated by LegalZoom for accuracy or changes in the law.

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