Sometimes in the conference rooms of corner side offices or at a cafe over a steaming cup of coffee, negotiations happen every day in the world of business and e-commerce. However, a negotiation cannot be completed unless an agreement or legal contract binds it. It must be ensured that formal agreements are drawn up so business negotiations between organisations remain valid and secure. These are testaments to urgent business meetings and deals.
Fundamental rules are laid down before committing more time and effort to an organisation. This is when the Letter of Intent comes to the rescue, as this is a formal agreement where two parties commit to the intention of building a business together.
What is a Letter of Intent
A letter of intent is a document that outlines the understanding by two people or organisations getting together for business; it is a legally binding document. These documents are commonly used in partnerships, restaurant businesses and several joint ventures. These are presented in a letter format and contain certain stimulations, requirements, timelines and provisions. This document is not restricted to business alone and applies to all the parties involved in a partnership.
Understanding the letter of intent is essential as the letter contains different provisions based on the deal, such as whether or not the deal is on the table, whether at least one of the parties is financially secure, or conditions about poaching the other party’s employees.
Both parties have the right to draft it or tweak the other party’s document individually, so that when they both sign it, there would be no surprises there. The letter has to go through thorough consideration before finalising it.
Purpose of Letter Of Intent
The purpose of a Letter of Intent (LOI) may depend on the situation. One instance could be that it protects the buyer in case of getting a loan from the bank, and also helps when one party is financially secure for both of them. It is not a legally binding contract but helps in places where business documents are essential. Both the parties need this document to outline some necessary and critical plans to negotiate over and finalise a project, as this would serve as document proof. The final document would then state the nature of a partnership, critical negotiation points and protection for both parties.
What to Include in the Letter of Intent
Before you write your letter, clarify your objectives for the business and provide the correct information as this can be used in a court of law by the other party. Keep the details simple and avoid complex terms as there could be a lot of changes over the negotiation where these complex terms can pose an issue. When in doubt over the nature of the language while drafting the letter, it is best to consult an attorney as their expertise will help for the correct form of legality.
The introduction states the purpose and description of the transaction for both parties, along with the following.
- Phone numbers
- Address of the office
- Email IDs for electronic documents
- Purpose of the letter
- Business name and history, not necessary in case of a startup
- Nature of Business intended (Product to sell/buy intention)
- Transaction and Timeframe
The next details are regarding the type of transaction in the deal and the price distribution, though that could be subject to change. The draft includes the timeline for the party to accept the proposal, which could be subject to change as well.
Here’s an example of a draft letter including the timeline.
“Based on our fundamental overview of the discussion over terms and conditions, we are pleased to submit the transaction terms for ‘BUSINESS NAME’ and would like to purchase 100 percent equity including all liable assets belonging to the company. On further review of the discussion held, these are the purchase terms: We want to purchase XXX shares in the company for XXX price and invest in these shares by 2030.
- Contingency List
These are the abilities that both parties need to present for the other party to accept the letter. One instance is that at least one party must be financially secure for the business, or the deal’s closure depends on the company’s stock market performance.
- Due Diligence
This is a process of investigation or audit of all the tax and financial documents of the party concerned to protect the rights of both parties and respect the agreement. This is conducted mutually through both parties to avoid any surprises during the final audit of the document.
- Related Binding Agreements
Even though the letter of intent is not a legally binding agreement, you could include other agreements under the business protection clause to avoid any conflict. The non-disclosure agreement forbids the parties to disclose their business pact to anyone. The Non-Solicitation agreements prevent the parties from hiring each other’s employees for competition or data breach purposes.
6. Non-Binding Commitment
Insert a section mentioning that this document should only be disclosed to both parties and nobody else. The document is non-binding unless both parties sign the agreement in affirmative for the business. Add a disclaimer stating that this was a proposal to hold on to a business relationship and not a contract to start one without both parties affirmative.
Letter of Intent Sample
Dear Party concerned ,
We , hereby , provide a letter of intent from ‘BUSINESS NAME’ in respect of a transaction with ‘OTHER BUSINESS NAME’. We would like to extend this opportunity to merge with your existing business.
“Based on our fundamental overview of the discussion, we are pleased to submit the transaction terms for ‘BUSINESS NAME’ and would like to purchase 100% equity including all liable assets belonging to the company. We want to buy XXX shares in the company for XXX price.
Milestone for 2022- XXX shares
Milestone for 2023 – XXXX shares
This section includes terms and conditions and other restrictive agreements.
NON BINDING AGREEMENT & DISCLAIMER
Name and Signature
The above sample is a generic template but can be utilised for all businesses depending on the nature of your request. The letter of intent is a great way to start a company with a third party, and it is not restricted to business alone. In case of an unexpected family death, these can serve a purpose for the family’s future commitments and for sought after individuals who decide to pen down their intentions for the future. These are highly encouraged in the government offices as it brings to closure an important understanding of both the parties in an agreement.