Letter of Intent - LOI


DEFINITION of 'Letter of Intent - LOI'

Used in most major business transactions, a letter of intent (LOI) outlines the terms of a deal and serves as an agreement to agree between two parties. An LOI is similar to a term sheet in it's content, but differs in structure, (one formatted as a letter, another as a list of terms).


Loading the player...

BREAKING DOWN 'Letter of Intent - LOI'

The real utility of a letter of intent is that it formalizes a preliminary agreement on a topic before negotiations get underway, it outlines what can and can't be talked about outside of that negotiation and it provides a roadmap describe how things will proceed.

Letters of intent are up for negotiation as are the contracts themselves. One party may present an LOI, and then the other party can counter with edits or a different LOI entirely. Ideally, the end product will protect both parties in their subsequent negotiation and fulfillment of the contract that the LOI posits they will attempt to agree on.

A letter of intent can include provisions that are both binding and non-binding. The ways in which a letter of intent can be binding vary. Some of the least binding LOIs essentially contain a contractual agreement to treat the LOI as non-binding, some more binding LOI's can include the rules of negotiation of a contract as a binding agreement, others can specifically spell out elements of an agreement (for example, a date for deal to be finished, who will write the contract, specifics on financing) and usually include a condition in which they have to be approved by a board. One of the most binding types of letters of intent, also known as failed letters of intent, betray the entire concept of a letter of intent and serve as a contract in their entirety. A letter of intent should bring parties together and help lay out terms as a way to reduce the risk of litigation.

It's not uncommon that letters of intent include non-disclosure agreements, or include 'no solicitation' provisions. A non-disclosure agreement (NDA) is where parties agree what information stays confidential and what information can be shared. In the context of a LOI, an NDA would refer to specific components of the deal. A no solicitation provision would stipulates that one party can't hire any of the other party's employees.

Other ways that an LOI can protect both parties negotiating a deal are if provisions where the deal can only go through if financing has been acquired by one or both parties, or that a deal has to be made by a certain date.

Examples of Use

Common uses of LOI include:

  • A way to clarify key points of a deal needing to be negotiated
  • As a way of announcing that two parties are negotiating (joint venture between companies, or merger)
  • To protect all parties involved in a deal

In the context of a business deal, the letter of intent is created by the corporation with its management and legal council, among others, and outlines the details of the action. Letters of intent are used during the merger and acquisitions process to outlines a firm's plan to buy/takeover another company, and will commonly disclose the specific terms of the transaction (whether it is a cash or stock deal, for example).

Letters of intent aren't exclusive to the business world. An LOI can be used  to outline the thoughts and hopes that parents have regarding their children in the event that the parents die. The courts use the information contained in the letter of intent to determine what happens to the children. Unlike wills, letters of intent are often not legal documents. However, because a letter of intent represents the wishes and desires of the parents, the courts will still often use it as a benchmark in conjunction with other documents to determine what happens to the children.

Letters of intent are highly encouraged for those looking for government grants. Letters of intent can help provide staff at an agency to get an estimate of the amount of work needing to be done for review. 

Letters of intent are also commonly used by colleges looking to recruit varsity high school athletes. If a student is from a high school exhibits an aptitude in both their sport of choice and in academics, and are recruited to play Division 1 sports at a university, a show is usually made of the student signing their letter of intent to attend that college that has recruited them and play the sports.

  1. Takeover

    A corporate action where an acquiring company makes a bid for ...
  2. Qualifying Transaction

    A type of transaction that occurs when a company issues public ...
  3. Corporate Action

    Any event that brings material change to a company and affects ...
  4. Abeyance

    A situation in which the rightful owner of a property, office ...
  5. Hostile Takeover

    The acquisition of one company (called the target company) by ...
  6. Merger

    The combining of two or more companies, generally by offering ...
Related Articles
  1. Economics

    Understanding Letters of Intent

    A LOI is used in most major business transactions to outline the terms of the deal that has been struck between the two parties.
  2. Retirement

    6 Estate Planning Must-Haves

    You need an estate plan even if you don't have significant assets. Learn what you need to include in yours.
  3. Mutual Funds & ETFs

    The Buy-Side Of The M&A Process

    With almost $2 trillion in sales yearly, find out how these mergers and acquisitions take place.
  4. Retirement

    Letter Of Instruction - Don't Leave Life Without It

    This simple document can take the guesswork and headache out of settling your estate.
  5. Economics

    What are Acquisition Costs?

    A company can recognize acquisition costs as those costs used to buy property and equipment.
  6. Professionals

    Charity or Retirement Saving: Which to Prioritize?

    Financial planners need to help clients with their financial goals but also support them in their philanthropic endeavours.
  7. Professionals

    How Legacy Planning Can Help Capture New Clients

    Don’t underestimate the importance of legacy planning with your clients—it could serve as method for you to create new business with any heirs.
  8. Professionals

    Tips for Retaining Your Client's Heirs

    It's a good idea to start working with your clients' children early on to forge relationships and hopefully continue to manage that wealth.
  9. Savings

    Passing Down Values and Money to the Next Generation

    Amassing wealth to pass down to your kids is great unless your values don't come with it. A priceless gift is teaching them to be financially responsible.
  10. Investing

    Estate Planning for Singles

    Now that singles dominate the population, it's important they understand the essentials of estate planning for indivdiuals.
  1. What is the difference between a letter of intent and a memorandum of understanding?

    A letter of intent is likely to encompass a number of different aspects, and it varies in length according to the level of ... Read Full Answer >>
  2. How does a letter of intent work in the context of mergers and acquisitions?

    A letter of intent, or LOI, is used to set forth the terms of a proposed merger or acquisition. It is usually the first step ... Read Full Answer >>
  3. Can I put my IRA in a trust?

    You cannot put your IRA in a trust while you are living. You can, however, name a trust as the beneficiary of your IRA and ... Read Full Answer >>
  4. How long does it take to execute an M&A deal?

    Even the simplest merger and acquisition (M&A) deals are challenging. It takes a lot for two previously independent enterprises ... Read Full Answer >>
  5. How does the trust maker transfer funds into a revocable trust?

    Once a revocable trust is created, a trust maker transfers funds or property into the trust by including them in a list with ... Read Full Answer >>
  6. What are some common accretive transactions?

    The term "accretive" is most often used in reference to mergers and acquisitions (M&A). It refers to a transaction that ... Read Full Answer >>

You May Also Like

Hot Definitions
  1. Purchasing Power

    The value of a currency expressed in terms of the amount of goods or services that one unit of money can buy. Purchasing ...
  2. Real Estate Investment Trust - REIT

    A REIT is a type of security that invests in real estate through property or mortgages and often trades on major exchanges ...
  3. Section 1231 Property

    A tax term relating to depreciable business property that has been held for over a year. Section 1231 property includes buildings, ...
  4. Term Deposit

    A deposit held at a financial institution that has a fixed term, and guarantees return of principal.
  5. Zero-Sum Game

    A situation in which one person’s gain is equivalent to another’s loss, so that the net change in wealth or benefit is zero. ...
  6. Capitalization Rate

    The rate of return on a real estate investment property based on the income that the property is expected to generate.
Trading Center
You are using adblocking software

Want access to all of Investopedia? Add us to your “whitelist”
so you'll never miss a feature!