A letter of intent template is important for business partnerships that you might need to utilize at many points while running your business. This common document helps negotiating parties establish general terms and initial offers and conditions until a more formal agreement is made.
This ensures that both parties will proceed in good faith during deliberations, even if they don’t end up working together. Use our lawyer-approved and customizable business Letter of Intent template to help navigate your business relationship needs.
What Is a Letter of Intent?
A letter of intent, also referred to as a letter of understanding or as a term sheet, is an agreement between two parties who intend to do business together. The nature of the business can take many forms, such as a sale, purchase or joint venture. A letter of intent is an initial agreement that establishes terms for an eventual definitive agreement at a later date.
Essentially, it paves the way for steps such as due diligence and could include binding terms such as exclusivity, non-disclosure or non-compete agreements.
Why Do I Need a Letter of Intent for My Business?
A letter of intent is essential for any business. Here are a few reasons why you need a letter intent for your company:
If you are the buyer, a letter of intent may give you “right of first refusal,” meaning it prohibits the seller from finalizing an agreement with another party before reaching an agreement with you.
Sensitive information is often disclosed during negotiations and a letter of intent ensures that the information you disclose will not be used against you.
A letter of intent is also useful for outside investors or other third parties who may want to see evidence of a planned transaction before it is finalized.
It is important to have the initial terms of a negotiation in writing so you have something to refer back to in case of disagreements.
By including a closing date by which to finalize the agreement, you can ensure that negotiations don’t drag on indefinitely and can abandon the agreement if it is past the deadline and you don’t want to grant an extension.
What Does a Business Plan Letter of Intent Include?
The letter of intent should include information on the parties involved, the nature of the proposed agreement and any other important details. See the breakdown of what that looks like here:
- Introduction: This should include a statement of purpose describing the nature of the transaction, the date of the agreement and definition of terms.
- Identification of Parties: This is a clear description of the two entities (businesses or individuals) entering the agreement.
- Transaction and Timing: Create a general description of the transaction — it could include deadlines to finalize the agreement with the possibility of an extension if preferred and the first offer for negotiation.
- Contingencies: This section describes the necessary steps to be completed before a definitive agreement can be reached and could include securing of financing, receipt of necessary third-party consents, confirmation of due diligence and receipt of any required regulatory approval.
- Due Diligence: A deadline should be set for the buyer and seller to verify the legitimacy of the other parties’ claims, which could involve checking company records or verifying tax and legal documents. This should include a clause stating that both parties will cooperate with requests for information in good faith, that is to say they will provide all requested information without omission or falsity.
- Covenants: A letter of intent can include binding terms, such as a non-compete agreement, which protects both parties from competition by the other since sensitive information can be revealed during due diligence investigations. Or a non-disclosure agreement can be included that states that information obtained during due diligence investigations won’t be made public. It is important to be very clear about which aspects of the agreement are binding.
- Expenses and Costs: It’s smart to include a statement that ensures that each party is responsible for its own costs and accountant fees.
- Closing Date: The letter of intent should include a closing date where parties agree to abandon the deal if it’s not finalized by that date.
Other Things to Note While Drafting a Letter of Intent
- The letter of intent should be clear that it does not constitute a definitive agreement and that all non-binding terms are subject to change.
- A letter of intent doesn’t need to be prepared by a lawyer, but it needs to be signed and agreed upon by both parties and preferably witnessed by a third party.
- To avoid confusion about which parts of the agreement are binding, it’s a good idea to keep all statements simple and save details for a definitive agreement.
- All parties should sign and date the letter and have it witnessed by a third party, preferably a notary public.
- All parties should receive a copy after agreement.
- After signing a letter of intent, don’t disclose confidential information regarding the agreement without the other party’s consent.
- Keep in mind that the agreement itself is not binding — either party can walk away from the deal based on new information or lack of agreement.
- A letter of intent should include a date by which the transaction will be abandoned if conditions fail to materialize. It’s up to the parties to decide upon a time frame that the transaction will be either finalized or abandoned.
Download Your Letter of Intent Template Today
Whether you’re drafting a letter of intent for a business partnership, purchase or sale, using one can help kick things off on the right note. By using a reliable Business Letter of Intent template, you can rest assured that you’re on the right track.
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