An LOI is a common acronym that means a letter of intent. A letter of intent is a formal document, outlining an initial agreement between two parties. This is used extensively in several industries, and it allows both parties to prearrange a business agreement before they actually commit to it.
Not only is it used by several industries, but also for transactions that involve large sums of money. This is because it allows both parties involved in the agreement to outline the initial terms included in the final agreement.
Why is a letter of intent used?
An LOI is an extremely useful document because it allows two parties to define the structure of a future agreement. An LOI will usually include several NDAs (Non-disclosure agreements), to protect both parties involved in the arrangement.
Large corporations, as well as private investors, use LOIs to protect themselves from different types of scenarios. As it allows to define early on some of the most important terms of an agreement in a legal document format. It is also common for LOIs to include non-solicitation agreements, depending on the situation.
When is a letter of intent used?
LOI in business
It is widely used in business, especially when it comes to M&A. In order to outline some of the most important details of a transaction an LOI is used. It also prevents the acquired company from entering into talks with other prospective buyers.
These are some of the examples of the clauses included in an LOI. However, depending on the agreement, it may include other details. An LOI ensures that the terms initially agreed to remain unchanged until the deal is finally signed. Protecting both parties.
LOI in real estate
It is also common to use an LOI in real estate. For example, when a developer is looking for a location before it starts its due diligence. Since real estate development involves a lot of planning, and research, the buyer is able to protect his interests by setting the initial terms, included in this legal document.
Importance of an LOI
An LOI guarantees the initial conditions of certain transactions. As it allows both parties to make extremely clear what are the terms and conditions of the agreement. This protects both of them, in case one of the parties decides to alter their terms before finalizing the deal.
An LOI can also be used to divide the negotiation process into different steps. Making it easy for both parties to sign a legal document with some of the terms they agree on, before moving on to discussing some of the points where they might have some different views.
Example of an LOI
Let’s consider that a private real estate investor wishes to buy a certain property that is valued at a considerable amount. Due to the nature of the deal, and because there is a lot of due diligence that the buyer needs to do before he makes a decision, he might prefer to sign an LOI.
The LOI ensures that the initially agreed price is accepted when he finally decides to purchase the property. This protects him, from having to invest time researching and due diligently researching the property, and then the seller suddenly raises the price. This is just a simple example. However, LOIs are also used in the business world.
When a company is trying to sell one of its subsidiaries it might choose to sign an LOI, with the interested party. The business acquirer will often include an NDA, as well as some other conditions in other to protect its interests.
Image source: Unsplash