The Benefits and Drawbacks of Letters of Intent

Negotiating and memorialising the major expectations and parameters is a vital stage at the start of every successful business agreement. This article explains how to utilise an interim agreement, also known as a “Letter of Intent,” “Memorandum of Understanding,” “Agreement in Principle,” or “Indication of Interest.” The following is a short explanation of the benefits and drawbacks of adopting a Letter of Intent, as well as an alternative to consider.

Pros

If properly worded, a Letter of Intent is an excellent tool for ensuring that one portion of the agreement is meant to be binding and the other part is intended to be non-binding. Confidentiality, non-solicitation, and exclusive negotiation rights are often included in the contractual agreements. Among the benefits are:

a defined timetable for finishing the negotiation and transaction

a summary of the terms and structure of the business transaction

identifying significant concerns that are a deal breaker

Letters of Intent are also an effective tool for preventing the negotiating parties from interacting with outsiders early in the negotiation process for an anticipated exclusivity arrangement.

Cons

If a Letter of Intent is not properly worded, it may be considered as binding on the parties, resulting in unforeseen obligations and possible damages if the agreement is not eventually finalised.

Another Option

Given the hazards of utilising a Letter of Intent, many firms have elected to utilise a “term sheet” to put down the essential terms and conditions of a proposed commercial transaction. Although not usually signed by the negotiating parties, a term sheet performs many of the same roles as a Letter of Intent. It is a practical and less expensive option.