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Letters of Intent: What Are They and Why Do You Need Them?

By Barbara Beauregard   |    October 10, 2014   |    11:26 AM

Using the LOI in Your Small Business Deals

Letters of Intent or LOIs are used for a variety of purposes. Companies use them when they are going to buy or sell a company. Agencies use them to define scope of work and term information. Some school applications, especially graduate school applications, require LOIs as part of the application process.

The goal of an LOI is to provide adequate information on the scope of work and to persuade the receiving party into agreeing to the major terms of the deal.

When to Use an LOI

The purpose of an LOI is not to be the final agreement. It’s generally an interim agreement that lays out the major components of or what actions will be taken in a future deal. An LOI is generally considered a “pre-contract” expressing the intent of the contract and shows that both parties are interested in reaching a final deal. If both parties agree to the LOI, the final contract is usually just adding the legal language.

While LOIs are not required for deals, they act almost like a memo, laying out in writing what both parties discussed. The LOI establishes the core details of the deal. If both parties agree to these, then it’s easier to expedite the final contract.

For parties that may be subject to sensitive data, LOIs often also contain non-disclosure agreements (NDAs). NDAs keep parties from sharing sensitive data with other third parties. This could be extremely important for clients or potential buyers and sellers.

What’s in an LOI

LOI components will really depend on the type of business. For business sales, components include:

  • Total Purchase Price
  • Terms
  • Buyer and Seller
  • Method of Payment
  • Closing Date
  • Conditions of Closing
  • Other conditions

For an agency, items may include:

  • LOI Effective Date
  • Terms
  • Description of Services
  • Goals
  • Proposed Services
  • Service Terms
  • Payment

All LOIs should have a place for signatures, date and title and should be signed by both parties. Since it isn’t a binding agreement, an LOI usually doesn’t need to be notarized unless both parties require it.

Who Should Use an LOI

Nearly any type of business can use an LOI as a solid, good faith handshake. Wording will be different based on the business. For example, a small mom-and-pop grocery store selling their business to a larger retail store will have different requirements than a contractor requiring an LOI to start work on a client’s website.

LOIs are useful for getting approval on the major details of the deal before the final negotiations begin. LOIs show that both sides are really ready to move forward and are taking the deal and its outcome seriously.