Letter of intent

What a letter of intent is

A letter of intent is a statement of intent before a transaction, such as the sale of a business. It records the key points so both sides know what they are discussing, without any binding purchase agreement arising yet. The English term describes not the form but the effect: the intent is declared, the obligation is not.

The practical benefit lies in the sequence. Without this document, the substantive review begins without a shared basis and ends with two completely different ideas of the deal. With it, structure and price range come first and details afterwards.

Which points belong in it

• Subject matter: What exactly is transferred. Shares or individual assets. That question determines many later points.
• Purchase price: As a range or as a formula, for instance a multiple of adjusted earnings, plus how stock and receivables are treated.
• Structure: Form of payment, possible instalments, conditions such as hitting revenue targets.
• Timeline: Who reviews what by when and when the contract is meant to be ready.
• Exclusivity: For how long the seller refrains from talks with other interested parties.
• Confidentiality: Who may receive which information and what happens to it if the talks end.
• Costs: Who carries which advisory costs, in particular on termination.

What binds and what does not

The heart of the matter is that the commercial points are typically not binding. That applies to the price, but not to confidentiality and exclusivity. Those two clauses are usually marked expressly as binding, and they are the only ones that can be enforced.

Confusing the two leads to planning on a false basis. An interested party naming a much lower price after signing usually breaches no obligation. That is precisely the risk of this phase: the cost of review is initially carried by the seller while the price is still open.

What sellers should watch

Three points prevent the most frequent disappointments. First, an exclusivity period that is short and tied to progress, such as delivery of a draft contract. Second, reimbursement of review costs on termination if the buyer walks away without an objective reason. Third, a clear list of the information provided before the contract phase, so that no single review forces full disclosure of customer data.

It also helps to hold your own expectations in writing. Anyone bringing a clear idea of structure and price environment into the first draft negotiates details later instead of principles. A document containing only general intent pushes every difficult question into the contract phase, where it costs time and money.