What is "letter of intent"

n. any letter expressing an intention to take (or forgo) some action

A letter of intent (LOI or LoI, and sometimes capitalized as Letter of Intent in legal writing, but only when referring to a specific document under discussion) is a document outlining one or more agreements between two or more parties before the agreements are finalized. The concept is similar to a heads of agreement, term sheet or memorandum of understanding. Such outlined agreements may be mergers and acquisitions transaction agreements, joint venture agreements, real property lease agreements and several other categories of agreements that may govern material transactions.

LOIs resemble short, written contracts, but are usually in tabular form and not binding on the parties in their entirety. Many LOIs, however, contain provisions that are binding, such as those governing non-disclosure, governing law, exclusivity or covenants to negotiate in good faith. An LOI may sometimes be interpreted by a court of law as binding the parties to it if it too-closely resembles a formal contract and does not contain clear disclaimers.

A letter of intent may be presented by one party to another party and subsequently negotiated before execution (or signature.) If carefully negotiated, an LOI may serve to protect both parties to a transaction. For example, a seller of a business may incorporate what is known as a non-solicitation provision, which would restrict the buyer's ability to hire an employee of the seller's business should the two parties not be able to close the transaction. On the other hand, an LOI may protect the buyer of a business by expressly conditioning its obligation to complete the transaction if is unable to secure financing for the transaction.

Common purposes of an LOI are:

• To allow parties to sketch out fundamental terms quickly before expending substantial resources on negotiating definitive agreements, finalizing due diligence, pursuing third-party approvals and other matters
• To declare officially that the parties are currently negotiating, as in a merger or joint venture proposal
• To provide safeguards in case a deal collapses during negotiation
• To verify certain issues regarding payments made for someone else (e.g., credit card payments)

Potential downsides to using an LOI may include:

• The parties may engage in protracted negotiations on only a subset of a deal’s terms
• Management time and focus may be diverted
• Alternative opportunities may be missed and markets may move against the parties during negotiations
• Parties may reduce their lack of a workable deal framework into an LOI, with a hope of making progress later
• Public disclosure obligations may be inadvertently triggered
• The risk of leaks, exacerbated by the desire of some to tout the LOI to the world, or shop it to other parties