What Is a Letter of Intent?

There are many significant events in the life of a small business. Simply launching a new business or turning a profit for the first time are enormous accomplishments. There may come a day when you face a significant milestone, such as a merger with another company or an acquisition of or by another entity. These business events have a lot of moving parts and can take some time to finalize. Read on to learn more about how small business owners use letters of intent to confirm the details of transactions in writing.

Letters of Intent Defined

If you are a business owner, it may one day be your responsibility to negotiate a significant business event, such as a merger, through which your company combines assets and liabilities with another company, or an acquisition or take-over of or by your business.

With major business transactions, the devil is in the details. They are frequently complex and often take a long time to complete. You may be wondering if there’s there anything you can do in the meantime to memorialize the deal. This is where letters of intent come in. A letter of intent is a written document, sometimes known as a "pre-contract," that parties use to confirm their mutual understanding of the basics of the deal. A letter of intent works as an interim agreement to summarize the main points of the proposed deal.

Provisions and Consequences of a Letter of Intent

What can you expect to find in a letter of intent? It will depend on your specific circumstances, but you can tailor the letter to contain the provisions that are most important to you and the other parties involved. Typically, letters of intent contain assurances that both sides are interested in doing business together. This includes provisions such as:

• An identification of the parties to the transaction
• A summary of the key substantive issues and terms
• An expression of the commitment of the parties (sometimes, there’s even an agreement to issue a joint press release announcing the transaction)
• Provisions setting forth a timeline for the transaction
• Details of due diligence investigations or other information needed to complete the deal
• Privacy or nondisclosure agreements
• Termination provisions setting forth when the parties' respective obligations under the letter of intent will expire

Typically, letters of intent are not legally binding contracts. However, the parties can agree to include terms in the letter of intent that are legally binding. Ideally, these provisions should be clearly and unequivocally marked as "legally binding and enforceable." Also, be aware of any language in a letter of intent that might create unintended legal obligations, for example, language that the parties intend to act in the "utmost of good faith." To avoid these pitfalls when drafting a letter of intent, it's a good idea to work with an attorney experienced with business transactions.

Consider Seeking Professional Legal Advice

If your small business is preparing for a major transaction like a merger or acquisition, it's wise to first consult with a good business lawyer. To get legal help with all stages of major business transactions, including drafting a letter of intent, consult with an attorney who specializes in mergers and acquisitions.