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While not exclusive to business transactions, the letter of intention is often used by businesses as a precursor to a more formal agreement between two parties. The letter of intention gets the ball rolling by outlining the major issues before the negotiations commence in earnest.
Purpose of Letter
As its name would suggest, the letter of intention articulates in writing the intentions of two parties, such as a buyer and seller, to do business with one another. As Iowa State University notes, the purpose of the letter of intent is twofold: It establishes commitment between the parties to ongoing negotiation, and it provides concrete limits, such as deadlines and procedures for resolving roadblocks. By placing cards on the table before negotiations get underway, the letter of intent establishes the parameters of the discussion and a roadmap for future discourse.
Content of Letter
Although not as formal as a business agreement, a letter of intent is also not a hastily dashed memo, either. Every letter of intent should cover essential points and provisions, such as identifying the parties and the transaction, and the conditions required to conduct the transaction. Contingencies that must be met, such as financing, due diligence and compliance, should be specified. The letter of intent should state in some way that the parties are agreeing to agree and that, until the final agreement is made, the terms of the letter will not be binding.
Examples of Intent Letters
In one type of letter of intent used in business, the text discusses a future purchase of computer equipment. In the letter, the company buying the equipment and the seller are listed, and the specific models and quantity of computers are enumerated. The price to be paid and the initial deposit are stated, and a provisional date for signing a binding agreement is established. In a letter of intent to buy shares of a company, the letter states the price to be paid, the date of acquisition and payment terms, and it describes features of the final agreement.
Binding or Not Binding
While a letter of intention is not legally binding by virtue of what it is -- a good-faith obligation to negotiate -- it can be as legally binding as a contract if the parties agree that the terms of the letter are to be binding. So the letter should accurately state the extent to which the participants desire to be bound, because courts might be asked to examine the wording of a letter of intent to determine its enforceability.
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Timothea Xi has been writing business and finance articles since 2013. She has worked as an alternative investment adviser in Miami, specializing in managed futures. Xi has also worked as a stockbroker in New York City.