The Letter of Intent is often used for difficult or complex business transactions when two or more companies or organizations plan to work together. This article will explain the common aspects of such a business document and what should be included.
The purpose of the Letter of Intent in deal management
Even if potential contracting parties are seriously involved in contract negotiations and specifically strive for cooperation, the negotiation talks can drag on for a long time due to complex regulatory matters. In this case, the parties of the deal create a Letter of Intent (LOI). It is a contractual declaration of intent that the potential contractual partner issues to express their interest in concluding the contract.
The LOI is often used in connection with the sale and purchase of companies or their assets or negotiations regarding new investors’ admission. Therefore, private investors should know how such a declaration of intent comes about and what advantages it offers. Because a “Letter of Intent” provides essential information about how the contracting parties will structure the negotiations in the future.
The Letter of Intent allows us to solve two important practical problems at once:
- Fixing certain negotiating successes of the parties
With the help of such a Letter, you can discuss options previously recognized by the parties as unsuitable or, conversely, emphasize options that remain under consideration. For example, you can set likely price limits, agree on an appeal to an appraiser or intermediary, discuss the mandatory conditions for continuing negotiations, etc. In addition, such fixation avoids possible misunderstandings between the parties.
- Psychological impact on the parties
It is well known that reputation in business is still of no small importance. It is possible to evade obligations legally, but if it becomes known that a party has refused to comply with the terms agreed in writing, its reputation will not benefit from this. In general, it should be concluded that an agreement of intent is a viable tool for practical business.
Content of the Letter of Intent
For LOI creation, the object of purchase and the price must already have been determined by the contracting parties. Special digital solutions like Ubuntu are used to optimize these processes. Here you can read more about data room capabilities.
The declaration of intent should contain the non-binding nature of the declaration, the planned project, and the contents of the previous negotiations. In addition, a non-binding period is determined in which the contract negotiations are to be concluded. Regulation is also usually created for the exclusivity of negotiations with one another. In addition, a non-disclosure clause is usually stipulated since unofficial information from the company is often discussed during negotiations. As a rule, these clauses also result in a contractual penalty if they are disregarded. The term of the declaration of intent or the Letter of Intent ends as soon as the contract has been concluded or the specified period has expired.
If payments were made before the conclusion of the contract, clauses should be drawn up that compensate the buyer if necessary. In addition, attention should be paid to the usual regulations, such as agreements on a place of jurisdiction and choice of law, written form requirements, and severability clauses. Moreover, further clauses, such as set time limits or other conditions, can be included. So, how a letter of intent is structured and what exact agreements it contains varies from case to case.