A letter of intent is similar to a term sheet. Term sheets are generally more concise or curt, whereas a letter of intent looks and reads more like a letter. They accomplish the same goal in fleshing out the most important details about a transaction. They are similar in purpose: parties will enter into either a term sheet or a letter of intent, but not both. Often the type of industry or asset class that a party is buying will dictate which document is typically used. It is a matter of convention, not because of any legal purpose.
Who Creates a Letter of Intent?
Like the term sheet, the letter of intent is typically created by the buyer.
Is the Letter of Intent Binding?
Typically it is drafted so that it is not binding. If it is drafted poorly or carelessly, it can unintentionally become binding. Some portions, however, are often binding. As a result, a letter of intent is typically non-binding except for certain sections. Those sections often deal with exclusivity, i.e. the seller can’t shop for deal around while it is negotiating with the buyer. There is typically an obligation to negotiate in good faith for a certain period of time to see if a purchase agreement can be drawn up and signed. Finally, there are confidentiality provisions to prohibit people from sharing the terms that are being discussed.
What is The Benefit of a Letter of Intent?
The benefit of a letter of intent is similar to the benefits of a contract. The first benefit is to spell out the proposed terms. It is simple, but often overlooked concept, that even two honest, smart people who have the best intentions can misunderstand each other’s intentions. So, one of the purposes of and benefits of a letter of intent is to put on the table, in clear language, the proposed terms so that everyone is literally on the same page.
The second benefit of the letter of intent is, again, the same benefit that a contract provides: it can bind the parties completely to the terms of the deal or it can bind the parties with regards to few important provisions, like the no-shop or exclusivity provisions, confidentiality provisions and obligation to negotiate in good faith.