Why a Letter of Intent Is Important and When You Should Use It
A letter of intent, which is also referred to as a Letter of Understanding or Memorandum of Understanding is typically used during the earlier stages of a business deal between two parties. The Letter of intent (LOI) is often used to form an understanding of the basis for a final agreement.
Let’s take a look at a scenario in which a letter of intent would be used. Let’s say that you are a successful business owner in Edmonton and you are finalizing negotiations for a joint venture with another business. Both businesses understand that a final legal agreement will need to be drafted to include details which may have been briefly spoken about during negotiations and may still need to be resolved. Prior to investing time and money into finalizing the agreement, you may use a letter of intent to outline the understanding for the basis of the negotiated deal.
The main purpose of the letter of intent is outline the understanding for each business, details the outcomes of negotiations and create a mutual understanding for future steps. It’s important to be aware that a letter of intent does carry significant legal ramifications. Prior to signing a letter of intent you carefully review the document in detail or consult with a lawyer, which is highly suggested. Here are a few important factor s to keep in mind when signing a letter of intent.
Use Legal Names
Ensure that the parties involved in the transaction have the correct legal name. For instance, if you are looking to use an affiliate company in the agreement, ensure that the document specifies which entity will be part of the transaction.
Binding & Non-Binding Agreements
Binding agreements means that both parties are obligated to carry out the provisions in the letter of intent and by signing the agreement, they are committing to do so.A non-binding agreement, on the other hand, means that either party can withdraw from negotiations at any time, without having to sign a definitive agreement.
It is possible for a letter of intent to be drafted in such a way that the agreement can be divided into such a format to include both binding and non-binding provisions.
Non-binding information generally includes details of the proposed deal and are useful to help navigate attorney’s to draft formal legal agreements on behalf of their client. For additional clarification, you can include an emphasis that the transaction described in the letter of intent does not carry any legally binding obligation. As further protection, you can also eliminate language such as ‘parties will negotiate in good faith’ when referring to entering a definitive agreement. Such statements can carry legal obligations to finalize a deal outlined in the letter of intent.
Specify Any Contingencies
Contingencies are meant to further protect a business prior to committing to a legal contract. Fr example, A deal for acquiring another business can include a contingency clause that the buyer is allowed to perform its due diligence on the seller's financial position, debt, assets, operations and more. This will greatly benefit the buyer as it allows them to walk away from the deal without any legal ramifications, should a clause in the agreement not be met.
Other examples of contingencies that can be specified include
Non-disclosure or Confidentiality Agreement
This would work in the interest of one or both parties to keep information private between the two businesses. Keeping information secure would need to extend beyond the LOI, regardless of the business outcome.
No Shop Provision
In addition to securing private information, such as financial details or trade secrets, it can also be used as a negotiation tactic to leverage interest from buyers. Many businesses include the no-shop provision during negotiations to secure their position.
The letter of intent should also include any termination provisions to make obligations under the LOI clear as to when it will expire. Confidentiality, on the other hand, can remain in effect even if a letter of intent is expired.
Businesses use a letter of intent to shape their negotiations and understandings while giving them time to perform an due diligence needed. Once both parties are ready to continue with negotiations, a formal agreement would be signed. It is also recommended to have an attorney review any agreement that is signed. If you’re looking for a letter or intent, you can find a drafter version from Lawyak for a low price, click here to learn more details.
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