Using a letter of intent in business transactions

Agreeing on a business contract can be a long process. One step in this process may be to create a letter of intent. A letter of intent is a preliminary agreement that gets negotiations started.

The letter of intent outlines the basics of the business deal in question, plus the steps and process the parties are going to go through—with the ultimate goal of creating a contract. A letter of intent is sometimes called a memorandum of agreement.

Reasons to use a letter of intent

A letter of intent is an agreement that two people or companies will use to work toward an agreement for the sale of a property or business, or to enter into a joint venture. It's useful because it outlines the basics of the deal and what information has to be shared or determined in order for the deal to go forward.

If the letter of intent is for a sale, it may give the buyer the right of first refusal, which means the property or business can't be sold to anyone else unless the buyer chooses not to make an offer, essentially putting a hold on the property.

Enforceability of a letter of intent

A letter of intent is generally not binding since it's basically a description of the deal process. It is, in effect, an agreement to agree. Thus, either party can cancel the letter at any time.

However, some parts of the letter of intent may be binding on their own. For example, a right of first refusal would be binding. A nondisclosure agreement is another example of a provision that normally would be enforceable on its own.

Elements of a letter of intent

A letter of intent often includes the following provisions:

• Description. The letter should include a description of the business deal that is being worked on, with details such as the address of a property that is being sold or a description of the business being acquired. It also should include the names and addresses of the parties and the effective date of the letter.
• Price. If the parties are negotiating a sale, the asking price should be included. This is not a final price, just the original asking price—which is up for negotiation.
• Contingencies. The letter should describe things that must happen before the sale can take place, such as the buyer's being approved for financing or the seller's doing certain improvements to the property.
• Due diligence. The letter normally states that one or both parties will be requesting documents and doing research on the project to ensure all the facts are known and verified.
• Nondisclosure agreement. A nondisclosure agreement (NDA) is frequently included so that neither party can share information or trade secrets they learn during the negotiation process.
• Noncompete agreement. A noncompete agreement may be included to prevent either party from using information shared during negotiations to compete against each other.
• Nonsolicitation agreement. This type of agreement is included to prevent the parties from hiring away employees from each other or contacting each other's clients or customers.
• Timeline. The letter may include a date that negotiations must end by, which creates a timeline for the process, ensuring that things move along.
• Binding or nonbinding agreement. Language is usually included to make it clear what parts of the letter are binding on both parties.
• Signatures. Both parties should sign the letter of intent.

How to create a letter of intent

You can write a letter of intent on your own. It can be a good idea to have your letter reviewed by an attorney. Another option is to use an online service provider to help you draft your letter and make sure it meets the requirements in your state.

A letter of intent helps set the parameters for a business deal and makes sure both parties are on the same page. The letter clarifies the issues and terms of the possible deal so that the process can move forward.