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Letter of Intent (LOI)
A Letter of Intent (LOI) is a preliminary document that outlines the key terms and intent of two or more parties to enter into a formal agreement in the future. It’s not a binding contract in most cases, but it signals serious commitment to move forward with negotiations.
An LOI typically includes major deal terms such as purchase price, timelines, confidentiality obligations, and exclusivity periods. In corporate or commercial transactions, it serves as a roadmap for drafting the final agreement.
Why Letters of Intent Matter
An LOI bridges the gap between informal discussions and binding contracts. It provides clarity on each party’s expectations, prevents misunderstandings, and builds mutual trust before formal drafting begins.
In mergers, acquisitions, or large vendor negotiations, an LOI helps to:
- Establish key commercial and legal parameters early.
- Save time by aligning on deal structure before full legal drafting.
- Set timelines and exclusivity to keep negotiations focused.
- Protect both sides through limited binding provisions (like confidentiality).
Best Practices for Letters of Intent
- Specify which provisions are binding (confidentiality, exclusivity) and which are non-binding (deal terms).
- Clearly outline the scope, purpose, and next steps.
- Avoid overly detailed legal terms that make it appear as a final contract.
- Include expiration or termination conditions for the LOI itself.
- Review by legal counsel before signing—even if non-binding.
Example of Letter of Intent in Practice
A company signs a Letter of Intent with a potential distributor outlining pricing, territory, and exclusivity, pending final contract approval. The LOI binds both parties to confidentiality and good-faith negotiation but leaves the commercial terms non-binding until execution.
Frequently Asked Questions
Is a letter of intent legally binding?
Usually not as a whole, but parts of it often are. Confidentiality, exclusivity, and expense-sharing provisions are typically drafted to bind, while the commercial terms stay non-binding until the definitive agreement is signed. Say so plainly in the document. Courts look at the language and the parties’ conduct, so vague drafting can create obligations you didn’t intend to take on.
What’s the difference between an LOI and a term sheet?
They serve much the same purpose, and the labels often get used interchangeably. An LOI reads as a letter with narrative prose and signature blocks, while a term sheet is usually a bulleted list of deal points. Neither format determines enforceability. What matters is whether the document says which provisions bind the parties and which are just a plan for negotiation.
How long should an exclusivity period in an LOI last?
Most exclusivity periods run 30 to 90 days, long enough for diligence but short enough to keep momentum. The right length depends on deal complexity, how much financial and legal review is needed, and whether regulatory review is involved. Include a firm expiration date and say whether extensions require written consent, so the period doesn’t quietly roll on forever.
