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What is the purpose of a letter of intent?

On Behalf of | Jan 7, 2022 | Business Law

Hazleton business owners considering a business deal such as a merger, acquisition or partnership may have heard of the term “letter of intent” and may wonder what it is, and if it is necessary or helpful.

A letter of intent is a written agreement between two parties to a business deal that lays out the general terms of the deal. There are several positive aspects to a letter of intent. It ensures that both parties are on the same page with the deal’s terms and assures each party that the other is serious about the transaction.

The terms of a letter of intent are generally not legally binding on the parties; however, some terms may be. Therefore, it is important to clearly state which terms are legally binding and which are not. If one party does not fulfill their obligations according to any terms that are legally binding, they may face damages.

What goes into a letter of intent?

The specific terms of a letter of intent are ultimately up to the parties, depending on their respective situations. The letter of intent should clearly describe what information is still needed or what steps must be completed before the deal can move forward or be finalized.

A letter of intent usually contains an introductory section, which states the date the letter becomes effective and specifically identifies each party. Next, a description of the business transaction is generally included, as well as any next steps with a timeframe for completion. A contingency plan is often included, to give everyone a sense of what would happen in case of an unexpected occurrence.

Basic terms in a letter of intent include statement that both parties agree to act in good faith and cooperate in taking any necessary steps to move the transaction in its desired direction. A right of first refusal may also be included. A right of first refusal legally binds one party to this proposed deal before entering the same deal with anyone else.

Every written document involved in a business transaction is important. Business owners could benefit from advice and guidance from a trusted legal professional.