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Letter of intent

A letter of intent is an important step in a business deal. Bankrate explains.

What is a letter of intent?

A letter of intent provides a formal, but preliminary, agreement between two parties who intend to do business with each other. They are frequently used in business transactions as a pre-agreement. Their terms are nonbinding and still subject to negotiation pending a formal contract.

Deeper definition

Letters of intent outline the terms of a forthcoming business deal.  It’s often the first step in a transaction, because its purpose is to permit easy negotiation of the terms of the actual contract. They outline the details of what can and cannot be discussed, how the activity in question will proceed, and any applicable payment information.

Frequently used in a merger or acquisition, or the formation of a joint venture, a letter of intent often includes a non-solicitation clause, which prohibits one party from hiring the other’s employees.

They’ll include info like all of the required purchasing conditions, such as the purchase price, liabilities and any shares or assets included in the deal. Once the buyer and seller agree to its terms, the businesses can proceed with the contract.

Letters of intent can also be used for real estate, to demonstrate a serious commitment to a property purchase; in education, to express serious interest in a specific program, usually in postsecondary school; for wills, to provide an outline of the testator or estate’s wishes for their beneficiaries; and in construction, to detail services and liabilities.

One thing you won’t need a letter of intent for is an auto loan. You’ll just need the best rate, and Bankrate can help.

Letter of intent example

Karl and Friedrich intend to write a book together. They’re old friends, so they don’t want to jump straight into the formal contract process straight away. Karl decides to submit a letter of intent, specifying how much he expects to write and how much he expects Friedrich to write, and what proportion of the revenue they’ll collect for their contributions. Friedrich likes the terms, but negotiates a higher rate for himself because he intends to publish the book using his own money. Karl agrees, and they later draft a binding legal agreement containing what they discussed.




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