Letter of Intent - LOI

Loading the player...

What is a '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 its content, but differs in structure (one formatted as a letter; the other, as a list of terms).

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 that describes how things will proceed.

Letters of intent are up for negotiation, as are the contracts themselves. One party may present an LOI, 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 LOIs can include the rules of negotiation of a contract as a binding agreement. Or an LOI 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); these usually include a condition requiring these points 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 stipulate that one party can't hire any of the other party's employees.

Other ways in which an LOI can protect both parties negotiating a deal include provisions stating that 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:

  • as a way to clarify which key points of a deal need to be negotiated
  • as a method of announcing that two parties are negotiating (say, a joint venture between companies or a merger)
  • to protect all parties involved in a deal

In the context of a business deal, the letter of intent is created by the  management and legal counsel of a corporation, among others, and outlines the details of the action. For example, letters of intent are used during the merger and acquisitions process to outline a firm's plan to buy/take over 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 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 also used by those looking for government grants. Letters of intent can help the staff at an agency get an estimate of how much work may be required by a particular project or enterprise. 

Letters of intent are also commonly used by colleges recruiting high-school varsity athletes. When a university succeeds in attracting a student with aptitude in both a particular sport and academics to play Division 1 sports at that school, a show is usually made of the student signing his or her letter of intent to attend that college.

RELATED TERMS
  1. Letter Of Moral Intent

    A letter to a bank from a parent company whose subsidiary is ...
  2. Confirmed Letter Of Credit

    A second guarantee, in addition to a letter of credit, that commits ...
  3. Sight Letter Of Credit

    A letter of credit that is payable once it is presented along ...
  4. Transferable Letter Of Credit

    A letter of credit that permits the beneficiary of the letter ...
  5. Interpretive Letter

    A letter issued by banking regulators that interprets the banking ...
  6. Shareholder Letter

    A shareholder letter is a letter written by a firm's top executives ...
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

    Letter Of Instruction - Don't Leave Life Without It

    This simple document can take the guesswork and headache out of settling your estate.
  3. Personal Finance

    Financial Analyst Cover Letters That Get You Hired

    Crafting a strong cover letter for a job can increase your chances of standing out from the crowd and landing an interview. Some techniques that help.
  4. Professionals

    Reduced Sales Charges/Quantity Discounts

    Breakpoints A mutual fund company's scale of declining sales charges based on the amount invested is called the fund's breakpoint schedule. Below is an example of a breakpoint schedule ...
  5. Personal Finance

    Don't Be Without A Letter Of Intent

    If you don't have a letter of intent in your desk, write one now. Here's why – and what should be in it.
  6. Professionals

    Mutual Fund Analysis

    Mutual Fund Analysis
  7. Professionals

    7 Cover Letter Blunders

    It's not just your resume that matters. Find out which cover letter mistakes can keep you from landing a job.
  8. Personal Finance

    The Complete Guide To Job Searching: Cover Letters

    You have found a job that sounds ideal. You might have the exact skills that the employer is looking for, but unless you can broadcast your abilities, the employer may never know you are the ...
  9. Investing

    Letter of Credit

    A letter of credit is a document from a bank promising to pay the holder a certain amount if the holder fulfills certain obligations. Sellers in commercial transactions often require buyers to ...
  10. Professionals

    7 Cover Letter Blunders

    It's not just your resume that matters. Find out which cover letter mistakes can keep you from landing a job.
RELATED FAQS
  1. How does a letter of intent work in the context of mergers and acquisitions?

    Learn how a letter of intent works for a merger and acquisition deal and the types of provisions that can be included in ... Read Answer >>
  2. What are the different ways I can file my income tax return?

    Learn about the potential consequences of violating the terms of a letter of intent, such as breakup fees, damages and agreement ... Read Answer >>
  3. What content does a letter intent have to have?

    Review some of the standard language that ought to be included in a letter of intent between two parties in a business transaction. Read Answer >>
  4. How legally binding is a letter of intent?

    Find out when a letter of intent is binding and when it is not. Understand the roles of drafting language, relationships ... Read Answer >>
  5. What is the difference between a letter of intent and a memorandum of understanding?

    Understand what a letter of intent and a memorandum of understanding are, and learn the primary difference between the two ... Read Answer >>
  6. When is it necessary to get a letter of credit?

    Capitalize on assets and negate risks by using a letter of credit. Letters of credit are often requested for buying, selling ... Read Answer >>
Hot Definitions
  1. Stop-Limit Order

    An order placed with a broker that combines the features of stop order with those of a limit order. A stop-limit order will ...
  2. Keynesian Economics

    An economic theory of total spending in the economy and its effects on output and inflation. Keynesian economics was developed ...
  3. Society for Worldwide Interbank Financial Telecommunications ...

    A member-owned cooperative that provides safe and secure financial transactions for its members. Established in 1973, the ...
  4. Generally Accepted Accounting Principles - GAAP

    The common set of accounting principles, standards and procedures that companies use to compile their financial statements. ...
  5. DuPont Analysis

    A method of performance measurement that was started by the DuPont Corporation in the 1920s. With this method, assets are ...
  6. Call Option

    An agreement that gives an investor the right (but not the obligation) to buy a stock, bond, commodity, or other instrument ...
Trading Center