Letter of intent
A letter of intent is a document outlining the understanding between two or more parties which they intend to formalize in a legally binding agreement. The concept is similar to a heads of agreement, term sheet or memorandum of understanding. Merger and acquisition agreements, joint venture agreements, real property lease agreements and several other categories of agreements often make use of a letter of intent.
The capitalized form letter of intent may be used in legal writing, but only when referring to a specific document under discussion. Moreover, letters of intent resemble short, written contracts, often in tabular form. They are not binding on the parties in their entirety. Many letters of intent, however, contain provisions that are binding, such as those governing non-disclosure, governing law, exclusivity or a covenant to negotiate in good faith. A letter of intent may sometimes be interpreted by a court of law as binding the parties to it if it too-closely resembles a formal contract and does not contain a clear disclaimer.
A letter of intent may be presented by one party to another party and subsequently negotiated before execution (or signature). If carefully negotiated, a letter of intent may serve to protect both parties to a transaction. For example, a seller of a business may incorporate what is known as a non-solicitation provision, which would restrict the buyer’s ability to hire an employee of the seller’s business should the two parties not be able to close the transaction. On the other hand, a letter of intent may protect the buyer of a business by expressly conditioning its obligation to complete the transaction if it is unable to secure financing for the transaction.
Understanding a letter of intent
Letters of intent are useful when two parties are initially brought together to hammer out the broad strokes of a deal before the finer points of a transaction are resolved. Letters of intent often include provisions stating that a deal may only go through if financing has been secured by one or both parties, or that a deal may be squashed if papers are not signed by a certain date.
Letter of intent can be iterative in nature. One party may present an LOI, to which the other party may either counter with a tweaked version of that letters of intent or draft a new document altogether. Ideally, by the time both parties come together to formalize a deal, there will be no surprises on either side of the table.
Many letters of intent include non-disclosure agreements (NDAs), which contractually stipulate the components of a deal both parties agree to keep confidential, and which details may be shared publicly. Many letters of intent also feature no-solicitation provisions, which forbid one party from poaching the other party’s employees.
A letter of intent is usually drafted and signed while negotiations between parties are ongoing so that the final terms of a deal might vary from what was agreed upon in the letter of intent. Due diligence is conducted by both parties before doing business. It is a prudent business practice to complete due diligence before signing a letter of intent.
Types of letters of intent
Here are a few specific examples of different types of letters of intent:
- Purchase of real estate, business, or general property: You can use a letter to state your intention to purchase commercial or residential property or a business. The letter should specifically state that it isn’t an official purchase agreement and that the terms and conditions of the business transaction are to be stated in the actual purchase agreement that must be agreed upon by all relevant parties.
- Scholarship acceptance: A student could send a letter to an institution or organization when accepting a scholarship. The letter should express appreciation for the scholarship and excitement for the opportunity.
- Graduate school: If you intend to submit an application to attend a specific graduate school, you could send a letter of intent to that university. Some schools may even require a letter as part of their application process. The letter should let the recipient know that you’ve submitted your application and list the graduate program for which you’re applying.
- Acquisition: This type of letter is similar to the one that you would use when purchasing a business. However, it should be marked as confidential. As a sender, you may want to include the basic terms of the deal in addition to a nonbinding statement about the preparation of the agreement and procedures for negotiation.
- Employment: You could send a letter to express interest in working for a company, even if there isn’t a specific opening available. The letter can state the type of position you’re interested in or whether you’re looking for an opening in a particular department.
Purposes of a letter of intent
Common purposes of a letter of intent are:
- To allow parties to sketch out fundamental terms quickly before expending substantial resources on negotiating definitive agreements, finalizing due diligence, pursuing third-party approvals and other matters
- To declare officially that the parties are currently negotiating, as in a merger or joint venture proposal
- To provide safeguards in case a deal collapses during negotiation
- To verify certain issues regarding payments made for someone else (e.g., credit card payments)
Potential downsides to using a letter of intent may include:
- The parties may engage in protracted negotiations on only a subset of a deal’s terms
- Management time and focus may be diverted
- Alternative opportunities may be missed and markets may move against the parties during negotiations
- Parties may reduce their lack of a workable deal framework into a letter of intent, with a hope of making progress later
- Public disclosure obligations may be inadvertently triggered
- The risk of leaks, exacerbated by the desire of some to tout the letter of intent to the world, or shop it to other parties
In the UK construction industry, it has been noted that “a significant element” within the industry appears to be “content to have their commercial and legal relationships defined on the basis of a letter of intent rather than by clear and definite contracts”, as a consequence of which problems “often arise” in relation to liability.
Applications of a letter of intent
In the context of business deals, letters of intent are typically drafted by a company’s legal team, which outlines the details of the intended action. For example, in the merger and acquisitions (M&A) process, letters of intent detail whether a firm plans to take over another company with cash or through a stock deal.
Letters of intent also have applications beyond the business world. For example, parents may use them to express the expectations they have for their children in the event both parents die. Although they aren’t legal documents like wills, letters of intent may be considered by family court judges responsible for legislating what happens to the children under such circumstances.
Letters of intent are also used by those seeking government grants, and by highly sought-after high school varsity athletes. These individuals frequently draft letters of intent to declare their commitments to attend particular colleges or universities.
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.
What to Include in a Letter of Intent
Begin with a professional salutation. Find out the name of the employer or hiring manager, and include it in your opening. If you do not know to whom you should address the letter, call the office and ask.
Body Paragraph 1: Introduction
Begin your letter by introducing yourself and explaining why you are writing. If you are responding to a specific job listing, say so. Otherwise, simply explain that you are interested in working for the company.
You can explain what type of work you are interested in – for example, maybe you are looking for a managerial position or a position in a certain department – but don’t get too specific.
Body Paragraph 2: Highlight Relevant Skills
This is where you connect your skills and abilities to the job listing. Take the time to carefully review the job description and the requirements listed in it. Mention one or two important requirements of the job, and explain how you meet those requirements. Provide specific examples from your past work experiences.
If you are “cold calling” the company, explain how your skills would make you a good fit for the company. The closer you can match your credentials to the job requirements or the company’s n Body Paragraph 3: Call to Action
Conclude your letter with a brief paragraph on how you will follow up. If the job listing says not to follow up, simply state that you look forward to hearing from the employer.
End with a professional closing such as “Best” or “Sincerely.” If you are submitting a printed letter, include a handwritten signature followed by your typed name. If you are emailing the letter, conclude with your email signature.
Tips for Writing a Letter of Intent
Use the appropriate format. Use business letter format for your letter. Begin with your contact information, the date, and the employer’s contact information.
When sending an email, include a clear subject line. If you decide to send your letter in the body of an email, be sure to include a concise subject line that explains why you are emailing. If you are applying to a specific job, include your name and the job title. If you are cold calling, include your name and a phrase like “Job Inquiry” or “Marketing Expert Looking to Share Expertise.”
If you decide to send the letter via email, you also do not need to include any contact information or the date at the top. Instead, include your contact information in the email signature.
Research the company. Before writing, be sure to research the company to get a sense of the company’s culture, its mission, and its needs. This is especially important if your letter is a cold call. You need to explain how you would add value to the company, and you can only do this if you know what the company is looking for.
Don’t rehash your resume. Don’t simply rehash your resume. Instead, pick out your strongest qualifications and highlight them. Your goal is to showcase your best credentials to the employer so that they will be persuaded to read your resume, not to provide a full career history.
Consider using bullet points. A good strategy for formatting your letter of intent is to include a bulleted section that highlights your qualifications for the job. The bullets will help to make your qualifications “pop” on the page, immediately drawing attention to the skills and expertise you offer. A careful use of boldface can also help to catch the hiring manager’s eye.
Keep it short. Your letter should be no longer than a page. If you write a longer letter, the hiring manager will not likely read it.
Proofread your letter. Don’t forget to thoroughly proofread your letter for spelling, grammar, and formatting errors. Consider asking a friend or family member to read it over before you submit it. Your letter needs to be professional and polished.