A letter of intent (or a memorandum of understanding) is a writing that explains some or all of the structure of a future business deal. The parties express their commitment to the subject matter or to the process of negotiating a more definitive agreement. Such a letter can be formal or informal, and it may be legally binding in whole or in part, or it may be legally nonbinding.
A letter of intent is a great tool for negotiating a business deal like yours. You can use it to set your expectations, to identify the bigger issues that need to be fleshed out, and to clarify the who, what, where and when.
It’s also a useful tool for preventing the other side from walking away from the deal. If you are unsure of their commitment, asking them to sign a letter of intent can be a great litmus test to see if they truly are dedicated to getting the deal done. If they balk on signing it, you know where you stand.
Sometimes, a letter of intent is useful to summarize the proposed deal so that one of the parties can take it to their board of directors or investors or whomever needs to approve the transaction before they commit to it.
Letters of intent can also be useful down the road when things go sideways. You can use the letter to show that the other party is being inconsistent with the original intent of the parties.
Or if things get really unpleasant, letters can be used as evidence to show what the parties contemplated, assuming no later contract is entered into, or to define ambiguous provisions of the later contract.
Whether or not you do a letter of intent will depend on your relationship with the other party. Consider the cost of having an attorney draft it versus doing it yourself, how long it will take to draft, the anticipated business deal’s duration, and whether or not it would be efficient.
Consider how certain you need to be about the other party’s intent. If you anticipate significant problems, a letter of intent might be a good place to start identifying and working through those problems.
The parties can decide whether or not to make the letter binding. Often, parties choose to make the letter of intent binding until a final contract is executed.
If time is short and your deal seems relatively straightforward, you may want to bypass the letter of intent and focus on drafting and executing a contract.
Mary Luros is a business law attorney with Hudson & Luros, LLP, in Napa, and can be reached at email@example.com or 418-5118. The information provided here is not intended as legal advice, nor does it form an attorney-client relationship with the author. The author makes no representations as to the reliability or accuracy of the above information. In a perfect world we wouldn’t need disclaimers — or attorneys.