Letter of intent for business transaction: 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 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 a more formal contract. Moreover, outside investors or other third parties may want evidence of an agreement. This will allow for an early start to drafting loan documents or obtaining necessary approvals.

A letter of intent 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 negotiation period between the parties and a final and satisfying agreement.

Factors to consider while drafting a letter of intent

Letter of intent description

A letter of intent describes a potential transaction between two or more parties. It isn’t a final agreement and shouldn’t sound like one. The letter may be treated like a complete contract if the document is too definite. The wording should show that you’re proposing negotiations about a transaction but aren’t committing to the terms of the deal.

Preferred length of a letter of intent

A letter of intent should be short and straightforward. A lengthy and complicated letter may look more like a definitive agreement.

Terms to be included in a letter of intent

For a non-binding letter of intent

It is advisable to keep your letter of intent simple and not include too many details. Letters of intent are often non-binding but should include wordings that state as much. The following types of provisions are usually made non-binding:

• Identity of the parties
• Subject matter
• The purchase price or other compensation
• Requirements to finalize the letter
• The final agreement(s)
• Non-customary representations or warranties
• Covenants
• Indemnification terms

Limit using terms like ‘intend,’ ‘desire,’ ‘would,’ or ‘may.’ Don’t use the words ‘shall’ or ‘will’ as these tend to imply that a final agreement has been reached

For a binding letter of intent

If parties provide detailed and specific terms in these documents, it will be considered a legal document binding two parties with the deal. But, 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. If any of the following provisions will be in your letter of intent, they should be identified as binding:

• Closing date
• The time frame for due diligence
• Confidentiality
• Non-competition
• Exclusive dealing

If you ignore one of the binding provisions in a letter of intent, you may be required to pay fees and fines. For example, if you breached a clause that prohibited you from publicizing the letter of intent, a court could prevent further disclosure and order you to pay damages to the other party.

Closing a letter of intent

Sign two copies of the letter, one for you and one for the other party. The letter of intent acts as a confidentiality agreement; hence, don’t disclose the information relating to the letter or the proposed transaction without the other party’s consent after signing it.

Even if a letter of intent is drafted and signed, it doesn’t 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, not a promise to close a transaction.

It’s a good idea to get your document witnessed or notarized. This will limit later challenges to the validity of a party’s signature.

If your letter of intent is complicated, contact an attorney to create a document tailored to your requirements.

Key sections to add in a letter of intent for business transaction document

The following instructions will help you understand the terms of your letter of intent. Please review the entire document before starting your step-by-step process.

Introduction

This section identifies the document as a letter of intent. Include details about the parties involved and what type of organization(s) they are. Briefly describe what each party will do in the proposed transaction. This section also clarifies that the letter is non-binding in its primary terms.

Transaction

In this section, describe the proposed transaction. This may be selling property or services, a real estate transaction, a joint venture, or some other activity. Here, you can describe each party’s responsibilities in the proposed transaction.

Consideration

In most agreements, each party is expected to do something. This obligation may be to perform a service, transfer property ownership, or pay the final purchase price. If the proposed transaction requires one party to pay the other a certain amount, enter this amount. You can add details about when this payment is due and how that payment will be made (e.g., cash, promissory notes, etc.).

Timing

If the proposed transaction involves the business sale or purchase of a piece of property, you should set a closing date, at which point the property will be transferred. Enter the closure date of the proposed transaction.

Contingencies

A contingency is something that must happen before something else can happen. In this case, the contingencies are the things that must occur before the parties will become obliged to go through with the proposed transaction. More specifically, the following things must occur:

• The two parties sign one or more final, binding agreements. Enter the governing law needed to interpret those agreements.
• Any permissions required have been received (e.g., government permits, the consent of each party’s board of directors, etc.)

Due diligence

This section indicates that each party has completed its due diligence process within a certain time.

“Due diligence” means investigating materials or information relevant to the proposed transaction. If the parties enter a joint venture, they may each want to investigate each other’s business. For example, if the transaction is a sale of assets, the buyer may only review 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 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. Ensure the addition of all relevant contingencies so neither party is surprised during negotiations about the final agreements.

Notice after completion of due diligence

Each party must tell the other that it has completed its due diligence and is ready to proceed with the proposed transaction. Either party can cancel if the other doesn’t give this notice within a certain time.

Extension of time for closing

If the proposed transaction can’t be completed after due diligence, the parties can change the closing date to give themselves more time or withdraw from the proposal. If this happens, neither party has any obligation to the other one.

Final agreements

Since this is a non-binding document, this section promises that the final agreement signed after this letter of intent will contain all the legally binding obligations.

No public disclosures

This clause prevents the parties from making public statements about the proposed transaction before the closing date and without the other party’s consent.

Expenses

This section states that each party will pay for its own expenses, even if the deal falls through or the costs arise from the termination of the letter of intent.

Non-binding letter; withdrawal

Herein, the parties agree that except for paragraphs expressly identified as a legally binding agreement, the document is only a proposal of their intention regarding the proposed transaction and is a non-binding agreement. If you want any of the provisions of your letter to be binding, list those provisions in this section.

Since the letter is non-binding, the parties involved are given the right to withdraw from negotiations (before a certain date) by notifying the other party in writing. Enter the date by which this notice must be given.

Date and signature of parties

In this section, write the date on which the document is signed. Insert your company’s name and the name of the person authorized to sign on its behalf. Write the other party’s name and the name of the person authorized to sign on its behalf.

Frequently asked questions

What is a business letter of intent?

Are you buying or selling a business, renting equipment, selling assets, or starting a joint venture? In the negotiation process, you can put an initial offer and some general terms into writing. This is where a letter of intent comes in, where you clarify your intentions so you can work towards the final business deal.

Its purpose is to set out the basic terms of a business proposal, which can include price, asset descriptions, limitations, and closing conditions. The parties can then do business from a consensus point that will end with a signed deal.

How do I write a letter of intent for a business purchase?

Here's the information you'll need to complete your letter of intent for business transactions:

• Who it's coming from: Determine if a business or individual is sending the document and have the name and contact information ready
• Who it's going to: Know who this document is going to and have the individual or business name and contact information ready. If it's a business, know the business type (LLC, corporation, etc.)
• Which state will govern it: Specify a state so it's clear what laws apply to the document
• Subject matter: Have the basic terms of your deal ready