Similar to a term sheet, a letter of intent outlines the terms of a deal and essentially functions as an “agreement to agree.”
In popular culture, letters of intent are most commonly referenced in regards to high school students who have agreed to play Division I sports for one competitive university or another. Just as sports-related letters of intent signal that both an athlete and a college expect to formalize a contractual relationship in the future, a business-related letter of intent signals that the interested parties expect to sign a deal in the future.
Practically speaking, letters of intent formalize preliminary agreements and usually detail (in terms that may or may not be binding) the ways in which formal contract negotiations related to the subject in question will proceed. Letters of intent function as “roadmaps” for contractual negotiations, although even letters of intent themselves may be amended and countered numerous times before they are finalized. When properly constructed, these legal tools help to bridge initial “gaps” between interested parties in efforts that reduce the risk of contract-related litigation down the road.
Oftentimes, letters of intent are subject to non-disclosure agreements so that subsequent contractual negotiations may benefit from the discretion of everyone involved. They may also serve as proactive protections for interested parties by featuring certain stipulations. For example, a LOI could potentially insist that a subsequent contract will only be considered valid if adequate financing is obtained by one or more of the parties involved. Letters of intent can also serve as important PR tools, if they are purposefully announced in order to signal to investors, consumers, etc. that two influential parties have agreed to negotiate. Mergers and acquisitions often begin in earnest when two companies tentatively announce the primary terms and intentions of their proposed negotiations and/or deal through a letter of intent.
Guy: “Don’t worry. I’m planning to propose when the time is right.”
Significant Other: “Yeah… I’m going to need you to sign this letter of intent.”