A letter of intent (LOI) in business and finance is a formal document that outlines the preliminary understanding between parties involved in a potential transaction or business arrangement. It serves as an initial expression of interest, indicating the key terms and conditions that the parties intend to negotiate further before finalising a formal contract or agreement.
Generally, an LOI is considered non-binding, meaning that it does not create legal obligations on its own. Instead, it serves as a precursor to a formal agreement and provides a foundation for further negotiations.
Key elements of an LOI:
- Identification of parties: An LOI clearly identifies the parties involved, including their names, roles, and contact information.
- Purpose of the LOI: It specifies the purpose or subject matter of the intended business arrangement or transaction.
- Terms and conditions: An LOI outlines the key terms and conditions that the parties wish to negotiate further. This may include financial terms, timelines, deliverables, and any other critical aspects.
- Confidentiality: An LOI may include provisions regarding the confidentiality of information shared during negotiations.
- Exclusivity or non-compete: In some cases, an LOI may contain clauses that restrict the parties from negotiating or engaging with other potential partners during the negotiation period.
- Termination or expiry: It may specify circumstances under which the LOI will terminate or expire.
An LOI serves as a starting point for negotiations. It provides a structured framework for discussions, helping parties understand each other’s expectations and requirements.
While an LOI is generally non-binding, it is crucial for parties to review the document carefully. Certain clauses within an LOI (such as confidentiality provisions) may be legally enforceable.
Once the parties reach mutual understanding on the terms outlined in the LOI, they proceed to draft a formal contract or agreement that incorporates the agreed-upon terms and is legally binding.