A letter of intent (LOI) is a document that someone uses in order to declare their intent to do something, such as make a purchase, apply for a job or education program, or to clarify points in a business transaction. They are written in letter format, and signed by one party (the party writing it). Since it is not a contract, it is not usually a binding agreement.
This document is important because it demonstrates knowledge about the the transaction and how it should be performed. It also shows a respectful interest in the other party and dealing with them in a professional manner while you express your interest in establishing a preliminary agreement.
This letter is a useful way to state your intentions without entering into an agreement for a business deal. Include as much information as possible in your letter to provide the recipient with the details they should know. This will help you to understand the transaction being performed and explain the outcome.
When it comes to small businesses and entrepreneurs, a letter of intent template allows the parties to define their plans and relationships without the high costs of corporate or business lawyers. By using a sample letter of intent, those involved can create one without incurring huge legal costs during the start of the proposed transaction.
While LOIs are not legally binding like a contract, they do constitute “good faith” between the parties to work together on whatever venture is outlined. They are designed to provide security for those involved so they can move forward to finalize the joint venture.
What type of situations would call for a free letter of intent template to be used? These letters act as a road map that outline the course of action that will be taken related to the subject matter. This can include business mergers, joint ventures, some graduate school applications, real estate transactions, and more. Mutual fund shareholders may occasionally use one to outline their intent to invest certain amounts of money at specified times. A shareholder might complete the letter of intent template in exchange for reduced charges related to the investment.
Letters of intent cannot be used to force a party to complete a negotiation or move forward with a venture. They are used only to officially declare that a party currently intends to do something.
However, there are occasions where this letter may be binding. If the letter starts specifying actions and promising completion of certain terms, it might become legally binding. In that case, it might begin to resemble a final contract or document, and become binding.
An LOI is often required before businesses spend too much time, effort, or money exploring and ironing out the details of a contract. Often, negotiations require manpower or capital. This can involve surveying, property inspections, researching legal issues, and much more. This document may make the other party feel more comfortable moving forward with these negotiation preparations.
A letter of intent may also be referred to as:
LOIs are meant to included detailed relevant information. So, it’s important that you review the terms. The terms may include (but aren’t limited to):
Remember, though, while the document should be detailed, including certain dates for performance or guaranteeing specific results by a certain date can make the framework information legally binding
You should use one in any transaction that involves a purchase before you sign the actual agreement. The most common times it is used in in a purchase of a business, purchase of real property, and the purchase of personal property (such as a car).
Depending on the circumstances, you may be unable to close the deal without an LOI. Banks and lenders may require one before they give you a loan to purchase the item. The other party you’re involved with may refuse to do business without one and you'll experience a deal collapse.
In this section, we're going to give you specific examples to help guide you through the letter writing process.
An LOI used to purchase a business, real estate (including commercial property), or general property lists the name, title, and address of both the interested buyer and the seller. It’s also dated. The potential buyer addresses the seller directly.
Before the letter closes, the buyer should state that how long they expect it to take to close the deal.
An LOI to accept a scholarship is sent from the student to the organization or institution providing it. It should include the student’s name and address as well as the name and address for the organization providing it. The letter should be dated and should directly address the contact.
The letter should end by thanking the contact and expressing excitement about the opportunity.
If you plan on submitting an application to attend grad school, you can create an LOI to the school you’re interested in attending. Similar to the other letters we’ve discussed, the letter should be dated and include your information as the sender and the information of the person from the grad school with whom you’ve been in contact. It may be a requirement to submit an LOI along with your application materials.
You should close by thanking the recipient for their time and consideration.
An intent for acquisition has the same basic components with the name and address of the sender and recipient. It also has the date. While it’s very similar to an LOI to purchase a business, it’s different in the sense that it may be marked as confidential.
These are often a bit longer than an LOI to purchase a business. It may include the basic terms as well as a non-binding statement of understanding and agreements of the parties regarding the procedures for negotiation and preparation of the definitive agreements.
Now that you’re familiar with the basics of an LOI and its most common uses, let’s look at how to write one.
Before you write your letter, make sure that you understand the purpose of your letter. You should also make sure that you have the appropriate contact information for the recipient. Also, it never hurts to review a template for the type of LOI you’re drafting. Remember, it’s fine to provide detailed information, but don’t use specific dates related to performance or you could go from non-binding to binding.
Determine the best greeting. Don’t be too informal. Use the name of your contact if you have it. The most common greeting is “Dear Mr. / Ms. Last Name.” If they have a professional title such as Doctor, Professor, or Coach, you should use their title instead of Mr. / Ms.
Write the body. The first paragraph should explain the reason you’re sending the letter of intent. If you’re buying a business, real estate, or other item, you should have a transition sentence that tells the reader that your next paragraph will begin explaining the proposed terms of the purchase. If you’re accepting a scholarship, you should express your excitement in a way that is professional and appropriate.
Subsequent paragraphs should explain the terms and what you’re willing to pay and how you’re willing to pay. For students accepting scholarships, you should make sure that you ask your contact to send you any information that you may need to further the process.
Before you close, you should state whether you expect that the other party stop looking for buyers so that you have the time necessary to complete your due diligence tasks to begin finalization of the agreement.
Finally, you should have a paragraph that states that the letter does not represent a purchase agreement.
Use a respectful closing. The most commonly used closing is “Sincerely” and the name of the person sending the letter.
Make sure that you read over the letter before you send it. If you’re unsure if your writing is unclear, ask a trusted colleague or friend to read over it. Do not send it until you’ve thoroughly reviewed it for typos and grammatical errors. This is a professional letter and you should do your very best to ensure it reads as one. Make a copy of it for your records.
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