THE IMPORTANCE OF A LETTER OF INTENT
What is a Letter of Intent? A Letter of Intent (LOI) is a written memorandum (intended to be non-binding), setting forth the basic deal terms of a proposed transaction. Whether it is to buy a piece of land, enter into a lease, or to buy a business, the LOI is used as a first step in making sure that the parties have, in fact, thought seriously about the transaction, have considered the essential terms needed to complete the transaction, and have a "meeting of the minds". In essence, the LOI is the jumping-off point whereby the parties then formalize a final written agreement (which can be much more expensive to prepare) that specifically spells out how they will complete their transaction. Absent an LOI, the parties may spend countless hours and money negotiating a contract, only to find out there is too great a difference in each party's expectations to finalize the transaction.
Traditionally, the LOI briefly covers the essential financial terms and other key business issues for the transaction and assumes that the customary business dealings within a specific industry will be followed regarding terms not spelled out in the LOI. Often a businessperson not familiar with LOI practices fails to recognize this customary tradition, thus missing the point of the use of an LOI, and certainly the expectations of the other party. Significant cost may be incurred by both parties, all to no end, because of a misunderstanding of the basic business terms that should be hammered out in the negotiation of the LOI. One recent example I am aware of dealt with a buyer that failed to include a financing contingency in his LOI, thinking that such a term could easily be added to a "non-binding" Letter of Intent. The seller was not pleased for many reasons and both parties had wasted valuable time and resources only have the deal die during formal contract negotiations when the condition was proposed.
Each business transaction will have its own essential terms and key business concerns. For instance, in the LOI for a lease there will be (among other important concerns) the rents and the term of the lease. In a business purchase, the LOI would include, among other terms, the purchase price, what assets are being purchased, and whether it is a stock or asset sale. Each LOI will be unique to that particular transaction. There may be some broad categories one could come up with, but the details of each would likely differ.
The two most important practical factors for using an LOI are to save time and money. A well- thought-out and negotiated LOI will ensure that parties are unlikely to waste valuable time negotiating a formal contract that would ultimately fail to meet the expectations of the parties. It is better to spend a little money in negotiating an LOI, rather than incurring unnecessary costs for attorneys and other professionals during formal contract negotiations, only to find out the parties never did have a basic meeting of the minds on the business transaction.
Take advantage of this business tool to save both money and time.
Caveat: LOIs can become binding contracts when the parties start to change their positions in reliance upon actions of the other party. Never trust the language in an LOI that it is "non-binding". Your actions can put you at jeopardy if a formal contract is not timely completed, or if the transaction is not clearly disavowed due to a failure of the LOI terms to be brought forward into the formal contract proposals.