Letter of Intent (LOI)

A letter of intent (LOI) is a short document that sets out the preliminary understanding between parties who intend to negotiate and complete a transaction. It outlines the major terms and conditions of a proposed deal so both sides agree on the broad framework before investing time and resources to finalize details.

How LOIs work

• Typically drafted while negotiations are ongoing to capture the key contours of a potential transaction.
• Generally non-binding with respect to the final deal, although specific provisions—such as confidentiality, exclusivity, or no-solicitation—are often written to be binding.
• Can be iterative: one party presents an LOI, the other may counter or revise it until both are aligned on major points.
• Often includes contingencies such as financing requirements, regulatory approvals, or deadlines for signing definitive agreements.
• Parties usually conduct due diligence before or during LOI negotiations; completing due diligence prior to final agreements is prudent.

Common terms included in an LOI

• Identity of the parties and a description of the transaction (e.g., asset purchase, merger, joint venture)
• Purchase price or valuation approach and basic payment terms
• Timeline and key milestones (closing date, exclusivity periods)
• Conditions precedent and contingencies (financing, due diligence outcomes)
• Confidentiality and non-disclosure provisions
• No-solicitation or non-poaching clauses
• Statement of intent regarding whether the LOI is binding or non-binding (and which provisions are binding)

Purpose of an LOI

• Clarify which key points must be negotiated and resolved in definitive agreements.
• Protect parties by documenting expectations and certain enforceable commitments (e.g., NDAs).
• Signal serious intent and provide a basis for further negotiation or for securing financing.
• Announce the nature of a proposed transaction (merger, joint venture, purchase).

Common applications

• Mergers and acquisitions: used to specify whether consideration will be cash, stock, or a combination and to set basic terms.
• Joint ventures and strategic alliances: to define scope and preliminary governance.
• Letters of intent to purchase (or letters of interest): buyers express serious intent and outline price, payment terms, and timing.
• Government grant applications and college athletic commitments: applicants or athletes use LOIs to express intent to participate or accept offers.
• Personal planning: parents sometimes draft LOIs to express preferences for their children’s care (non-binding but may be considered by courts).

LOI vs. Memorandum of Understanding (MOU)

• Both documents record preliminary agreements. An LOI is typically non-binding and framed as a letter; an MOU may be treated as binding in some contexts and is often more formal. Parties should state explicitly which parts, if any, are intended to be legally enforceable.

Practical tips

• Be explicit about which provisions are binding and which are not.
• Include clear timelines and conditions to reduce ambiguity and the risk of disputes.
• Use an LOI to secure confidentiality and exclusivity where needed before sharing sensitive information.
• Have counsel draft or review the LOI to ensure appropriate legal protection and clarity.

Key takeaways

• An LOI documents preliminary agreement on the main terms of a proposed deal and helps structure negotiations.
• It is usually non-binding, but confidentiality, exclusivity, and similar clauses are often enforceable.
• LOIs are widely used in business transactions (M&A, JVs) and in other contexts where parties want to signal commitment and agree on basic terms before finalizing a deal.