A letter of intent (LOI) is a formal document that signifies one party’s preliminary agreement to engage in a business transaction with another. It sets the groundwork for the deal by outlining the fundamental terms that both sides intend to negotiate, and details the steps expected before, during, and after the proposed arrangement.
Often, an LOI is prepared after conducting thorough due diligence, which helps assess the credibility and viability of the other party. Typically drafted by legal teams during early negotiations, LOIs are instrumental in significant transactions like merger and acquisition deals, joint ventures, or real estate agreements.
Additionally, an LOI often includes confidentiality or nondisclosure agreements (NDAs), ensuring sensitive information remains protected throughout the negotiation process.
Though it resembles a letter rather than a checklist, a letter of intent LOI shares similarities with a term sheet and generally follows a structured format. A well-drafted LOI or sample letter of intent typically includes the following elements:
Your LOI should be written with clarity and precision. To keep your content focused, consider using a letter of intent template or reviewing sample letters. These tools help maintain a logical flow and ensure all necessary components are addressed effectively.
The purpose of a letter of intent goes beyond merely expressing interest—it establishes a framework for collaboration, trust, and clarity between parties.
An LOI clarifies the terms of a deal, reducing the likelihood of misinterpretations that could derail the transaction. This clarity fosters transparency and enhances good faith in the negotiation process.
For instance, if two companies plan a merger and acquisition, an LOI helps ensure both sides agree on key elements such as valuation, share exchange ratios, and target dates. This alignment streamlines execution and minimizes unexpected disruptions.
Ultimately, a well-structured LOI allows both parties to move forward with confidence, knowing the roadmap is mutually understood.
Whether you’re an individual or a business, a letter of intent can be useful across various scenarios.
Individuals may use a letter of interest to convey their desire to engage in an opportunity, such as pursuing higher education or exploring career paths. These letters are often less about legal commitments and more about expressing intent and standing out—especially for students or job seekers.
In contrast, businesses utilize LOIs as part of their due diligence processes before committing to formal agreements. A letter of intent can outline important details like cost, scope, and timelines, offering a preliminary view of the engagement terms. This can include clarity on project scale, legal requirements, or expected dates of completion.
Jobs
For job seekers, a letter of interest serves as a proactive tool to showcase career goals and relevant experience—even when no official job posting exists. Unlike a cover letter, which responds to a specific listing, an LOI can be sent independently to introduce yourself and demonstrate initiative.
Such a letter can help highlight skills and experiences that might not be immediately visible in a résumé or LinkedIn profile, helping recruiters identify top talent in a competitive market.
Business
In the business world, an intent to purchase or partner with another entity often begins with a letter of intent. Whether it's a new joint venture, a real estate acquisition, or a strategic partnership, businesses use LOIs to announce upcoming deals and initiate negotiations before formal contracts are created.
These preliminary agreements allow both parties to set expectations, clarify the terms of a deal, and navigate legal or financial considerations ahead of binding commitments.
Education
Students often include a letter of intent in college or graduate school applications to express their intention to enroll. Also known as a statement of purpose, this letter highlights academic background and outlines future study plans, especially at the graduate level.
Such letters allow admission committees to gauge a student’s motivation, suitability for the program, and alignment with institutional values.
Businesses can leverage LOIs for various strategic purposes, particularly when engaging in substantial business transactions. Although sales teams commonly use them to progress toward a finalized sale, other departments—such as finance, legal, and procurement—also benefit from using LOIs.
Here are several business-specific uses of an LOI:
By using an LOI, businesses can ensure mutual understanding and mitigate potential disputes before formalizing agreements.
Writing a compelling letter of intent requires a balance of professionalism, precision, and thoroughness. Here are some best practices to follow:
Following these practices ensures your letter of intent LOI is both credible and effective in moving the negotiation process forward.
Despite their advantages, letters of intent carry certain risks, primarily because they are typically not legally binding. This means that, unless specified otherwise, the parties aren’t legally obligated to complete the transaction.
However, if a party acts in bad faith or breaks confidentiality, the other may pursue legal action for damages.
There are also risks of misrepresentation. A party might falsely claim they’ve secured funding or other resources, creating unrealistic expectations. For example, in a potential merger and acquisition, a misleading LOI could suggest premature certainty about the deal.
Additionally, agreeing to a lowball offer in an LOI could lock one party into terms of a deal that are not in their financial best interest—particularly in fast-moving markets.
While an LOI outlines key elements of a potential deal, it isn’t always the final word. An alternative is a memorandum of understanding (MOU), which serves a similar function but with a significant distinction.
Unlike a standard letter of intent, an MOU can be legally binding depending on its wording and jurisdiction. This means it may hold weight in a court of law, especially if it includes detailed fundamental terms and clear commitments.
If legal enforceability is important to your transaction, consider whether an MOU is a better fit than a traditional LOI. In either case, consulting legal counsel is recommended to determine the best course of action.
By understanding how and when to use a letter of intent, businesses, students, and professionals can navigate complex agreements with greater clarity and confidence. Whether you're exploring a joint venture, submitting a letter of interest, or formalizing an intent to purchase, having a well-crafted LOI can be a vital step toward achieving your goals.
