A letter of intent or LOI is a document outlining an agreement between two or more parties before the agreement is finalized. A LOI may also be referred to as a memorandum of understanding (MOU), or term sheet. Although the terms refer to different documents, the differences are often formal in nature, reflecting different drafting styles or business customs, not a substantive difference in what these various documents accomplish. The term sheet, LOI, or MOU can be used for mergers, acquisitions, and joint ventures (also commonly referred to as business sale, business purchase, and business alliance). Further below on this page, we provide specific templates for each type of transaction.
Letters of Intent, Term Sheets, and MOUs resemble written contracts, but are usually much shorter and are not binding upon the parties in their entirety. Many LOIs, however, contain provisions that are binding, such as non-disclosure agreements, a covenant to negotiate in good faith, or a "stand-still" or "no-shop" provision promising exclusive rights to negotiate. A LOI may also be interpreted as binding the parties if it too closely resembles a formal contract.
The purposes of a LOI may be:
- to clarify the key points of a complex transaction for the convenience of the parties
- to declare officially that the parties are currently negotiating, as in a merger, acquisition, divestiture, joint venture (JV), or strategic alliance proposal
- to provide safeguards in case a deal collapses during negotiation
The term sheet is the first step in the process leading to definitive agreements that will reflect the terms of the venture capital or other private equity transaction. A term sheet is the “agreement to agree” on the main points of a deal. There is always a tension in the preparation of the term sheet between whether to have a tightly negotiated, detailed term sheet, with most of the terms explicitly spelled out, or to have a more generalized term sheet, with the understanding that significant terms will continue to be negotiated during the due diligence process. The former approach can make drafting the definitive documents easier because the parties have spelled out the specific terms of the transaction, although it may be more difficult to re-negotiate key terms as the parties go through the process of conducting due diligence and documenting the transaction, even though not all provisions in a term sheet are binding. On the other hand, a simpler term sheet requires that more effort be expended during the final documentation phase of the transaction, but gives the parties more room to maneuver (and possibly re-trade) before the definitive documents are completed.