Letter of intent (LOI): what it is for
A letter of intent, or LOI, records the parties' interest in moving forward with a negotiation before the final contract. Well drafted, it organizes expectations and what has already been agreed.
What a letter of intent is
The letter of intent, also known by its English acronym LOI (letter of intent), is a document used in the early phases of a negotiation. It usually records the parties' interest in continuing to pursue a deal, such as a partnership, acquisition, or investment, before the definitive contract is signed. In general, it helps align understandings and organize the next steps.
What the LOI is usually used for
The LOI frequently appears in transactions that involve deeper analysis before closing. It tends to serve certain practical purposes in the negotiation.
- Formalizing the interest and the main terms discussed
- Defining deadlines and stages, such as audits and due diligence
- Establishing confidentiality regarding the talks
- Recording points still subject to negotiation
Binding and non-binding clauses
A sensitive point of the letter of intent is defining what is mandatory in nature and what is merely indicative. In general, parts of the document may be non-binding, while others, such as confidentiality and exclusivity, are usually treated as binding. Making this distinction clear tends to prevent doubts about the scope of the commitment.
Precautions in drafting
Even though it is a preliminary document, the LOI can produce significant effects depending on its wording. For this reason, it is common to pay attention to the language used so that the text reflects the parties' true intention. The appropriate treatment depends on the type of transaction and the stage of the negotiation.
Frequently asked questions
Does a letter of intent oblige the parties to close the deal?
It depends on what is written. In general, much of the LOI is non-binding as to closing, but certain points, such as confidentiality and exclusivity, may be mandatory. Reading the document carefully is important.
What is the difference between an LOI and a definitive contract?
The LOI usually records intentions and preliminary terms of a negotiation, whereas the definitive contract formalizes the agreement with complete obligations. The LOI precedes and organizes the stage that may lead to the final contract.
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