What Is a Letter of Intent?

A letter of intent (LOI) is a document declaring the preliminary commitment of one party to do business with another, that outlines the chief terms of a prospective deal. Commonly used in major business transactions, LOIs are similar in content to term sheets; however, LOIs are presented in letter formats, while term sheets are listicle in nature.

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Letter of Intent (LOI)

Understanding Letters of Intent (LOI)

LOIs are useful in preliminarily bringing two parties together to hammer out the broad strokes of a deal before the finer points of a transaction are resolved. LOIs often include provisions stating that a deal may only go through if financing has been secured by one or both parties, or that a deal may be squashed if papers are not signed by a certain date.

LOIs can be iterative in nature. Case in point: one party may present an LOI, and then the other party may counter with a tweaked version of that LOI or they may draft a new document altogether. Ideally, by the time both parties come together to formalize a deal, there will be no surprises on either side of the table.

Many LOIs include non-disclosure agreements (NDAs), which contractually stipulate the components of a deal both parties agree to keep confidential, and which details may be shared publicly. Many LOIs also feature "no-solicitation" provisions, which forbid one party from poaching the other party's employees.

Since LOIs typically discuss potential points of deals that have yet to be cemented, they are almost universally intended to be non-binding.

Examples of Use

LOIs aim to achieve the following:

  • Clarify which key points of a deal must be negotiated
  • Protect all parties involved in the deal
  • Announce the nature of the deal, such as a joint venture or a merger between two companies

In the context of business deals, LOIs are typically drafted by a company's legal team, which outlines the details of the intended action. For example, in the merger and acquisitions (M&A) process, LOIs detail whether a firm plans to take over another company with cash or with a stock deal.

Beyond the reaches of the business world, parents may use LOIs to express their hopes for their children, in the event both parents die. Although they aren't legal documents like wills, LOIs may be considered by family court judges responsible for legislating what happens to the children, under such circumstances.

Finally, LOIs are also used by those seeking government grants, and by highly sought-after high school varsity athletes, who frequently draft LOIs to declare their commitments to attend particular colleges or universities.