A:

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 outlines an agreement between two or more parties and is usually produced before a final, formal contract. 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.

What Is a 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 been 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 can and can't be talked about outside of that negotiation, and it provides a roadmap that describes how things will proceed.

What Is a Memorandum of Understanding?

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

Letter of Intent vs. Memorandum of Understanding

A letter of intent or memorandum of understanding may serve a number of purposes. Such a document is likely to identify any terms that need to reach resolution 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 a business until the date the 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.

RELATED FAQS
  1. 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 >>
  2. How legally binding is a letter of intent?

    Find out when a letter of intent is binding and non-binding. Understand the role of drafting language, and when an LOI it ... Read Answer >>
  3. 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 >>
  4. What are the different types of letters of credit?

    Learn more about the different types of letters of credit that are used to facilitate exchanges between parties that might ... Read Answer >>
  5. What is the difference between a summary prospectus and an offering memorandum?

    Understand what investments require a summary prospectus or a offering memorandum, and learn the differences between the ... Read Answer >>
  6. When are you legally required to get a letter of credit?

    Learn how exporters or importers who deal in international trade use letters of credit to ensure that transactions are safe, ... Read Answer >>
Related Articles
  1. Managing Wealth

    Letter of Instruction - Don't Leave Life Without It

    A letter of instruction, or letter of intent, is a simple document that can take the guesswork and headache out of settling your estate.
  2. Managing Wealth

    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.
  3. Investing

    Are Hedge Fund Letters More Valuable Than 13Fs?

    13F filings can be a useful way to track hedge fund investment strategies, but sometimes it pays to go directly to the fund leaders themselves.
  4. Investing

    7 Tips for Writing a Homebuyer’s Letter to a Seller

    To win a real estate bidding war, use these 7 tips for writing a homebuyer’s letter to a seller that’s engaging and personal.
  5. Personal Finance

    What That Financial Aid Offer Letter Really Says (And How to Get More)

    Yes, you got a college financial-aid offer, but how good is it really? How to understand the fine print.
  6. Financial Advisor

    Buffett's Annual Shareholder Letter, 2016 Edition

    In his annual letter to shareholders, Berkshire Hathway chairman Warren Buffett touched upon a broad array of themes, including BNSF and climate change.
  7. Investing

    Brexit Dings British Bank Stocks

    British banks are taking a hit after Prime Minister Theresa May makes the Brexit breakup official.
  8. Financial Advisor

    IRA Tax Mistake? You Still May Have Time to Fix It

    Even if tax day has come and gone, errors still can be fixed through mid-October, including those to do with Roth and traditional IRAs.
  9. Insights

    Warren Buffett Gets a Big Thank You Note from Bill Gates

    Warren Buffett's investment philosophy and deep pockets have helped shape the Bill & Melinda Gates Foundation.
  10. Financial Advisor

    Is Your Broker Ripping You Off?

    We show you how to resolve a problem without getting the lawyers involved.
RELATED TERMS
  1. Confirmed Letter of Credit

    A confirmed letter of credit is a letter of credit with a second ...
  2. Letter Of Credit

    A letter of credit is a letter from a bank guaranteeing that ...
  3. Shareholder Letter

    A shareholder letter is a letter written by a firm's top executives ...
  4. Bank Confirmation Letter - BCL

    A bank confirmation letter is a letter confirming that a line ...
  5. Cover Letter

    A cover letter is submitted with a job application and resume ...
  6. Discussion Memorandum

    Published by the Financial Accounting Standards Board (FASB), ...
Hot Definitions
  1. Yield Curve

    A yield curve is a line that plots the interest rates, at a set point in time, of bonds having equal credit quality, but ...
  2. Gross Profit

    Gross profit is the profit a company makes after deducting the costs of making and selling its products, or the costs of ...
  3. Risk Tolerance

    The degree of variability in investment returns that an individual is willing to withstand. Risk tolerance is an important ...
  4. Donchian Channels

    A moving average indicator developed by Richard Donchian. It plots the highest high and lowest low over the last period time ...
  5. Consumer Price Index - CPI

    A measure that examines the weighted average of prices of a basket of consumer goods and services, such as transportation, ...
  6. Moving Average - MA

    A moving average (MA) is a widely used indicator in technical analysis that helps smooth out price action by filtering out ...
Trading Center