The Difference Between a Letter of Intent and a Memorandum of Understanding

Letter of Intent vs. a Memorandum of Understanding: An Overview

A letter of intent is likely to encompass a number of different aspects and it varies in length according to the level of specificity and the type of transaction. All letters of intent lay out the basics of a deal, including cost, time frame, and contingencies. Like a letter of intent, a memorandum of understanding (MOU) instead outlines an agreement between two or more parties and is usually produced before a final, formal contract.

Key Takeaways

  • A letter of intent is a document declaring the preliminary commitment of one party to do business with another.
  • A memorandum of understanding (MOU) is a document that describes the broad outlines of an agreement that two or more parties have reached.
  • The primary difference between the two is that a letter of intent is not binding, whereas a memorandum of understanding is considered binding and carries weight in a court of law.

Letter of Intent

A letter of intent is a document, often used in mergers and acquisitions, that records the preliminary terms of an agreement. Though the letter of intent is nonbinding, it is an important outline of the key terms that the parties involved in the transaction have agreed upon.

Ultimately, the information recorded in the letter of intent forms part of the definitive purchase agreement that legally sets out the transaction; it outlines what you can and can't talk about outside of that negotiation, and it provides a roadmap that describes how things will proceed.

Memorandum of Understanding

A memorandum of understanding (MOU) is an agreement between two or more parties outlining the terms and details of an understanding, including each party's requirements and responsibilities. It is often the first stage in the formation of a formal contract and does not involve the exchange of money.

Either document likely identifies any terms that need to resolve before completing the deal. The document also usually addresses the time frames and deadlines for the transaction, the price, and the method of payment. Other aspects that may be included in the letter of intent or memorandum of understanding include warranties of marketable title, a list of total liabilities and total assets, and operating condition of all equipment and machinery at the time of purchase.

The letter of intent or memorandum of understanding may outline stipulations for the operation of the business until the date that business is sold. A drop-dead date is an important clause; this is a point in time when the parties agree to discontinue negotiations if they haven't reached an agreement.

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Memorandum Of Understanding (MOU)

The Bottom Line: What the Law Says

Under U.S. law, an MOU is often the same as a letter of intent. In fact, arguably a memorandum of understanding, a memorandum of agreement, and a letter of intent are virtually indistinguishable based on American case law. All communicate an agreement on a mutually beneficial goal and a desire to see it through to completion.

MOUs communicate the mutually accepted expectations of the people, organizations, or governments involved. They are most often used in international relations because, unlike treaties, they can be produced relatively quickly and in secret. They also are in use in many U.S. and state government agencies, particularly when major contracts are in the planning stages.