If you're in the process of negotiations with another company, there's a good chance that at some point, you'll draft a letter of intent. But what is a letter of intent? And are letters of intent binding? Find out everything you need to know with our comprehensive guide, including a letter of intent template for the UK.
Letters of intent explained
A letter of intent is a document between two businesses that declares a preliminary commitment to doing business. The letter of intent should outline the terms of any future agreement and can be used to record negotiations and discussions. However, it's important to note that negotiations don't need to be completed for you to draft a letter of intent.
What is the purpose of a letter of intent?
Different entities use letters of intent for a range of reasons. They're most commonly used to outline the broad strokes of a deal before the fine points and details are finalised later. They may also be used to signal that the entities are negotiating an agreement, such as a merger. Ultimately, the aim of any letter of intent is to clarify the key points of the deal, disclose the nature of the deal, and protect both entities involved in the deal.
What is covered in a letter of intent?
Typically, a letter of intent will cover a range of issues. Firstly, the details of the agreement and a target date for completing the signing. Then, you'll need to cover the key obligations of both parties, as well as who will produce the first draft of the agreement. Letters of intent are also likely to cover any pre-conditions to signing the contract, such as the production of critical documents or completing an exercise in due diligence.
Are letters of intent binding?
Letters of intent are not contracts, and as such, it's vital that you sign a legally enforceable agreement before completing work or providing services under the terms outlined in your letter of intent. However, there are specific terms within the letter of intent that are legally enforceable, and as such, it's crucial to pay close attention to these terms:
Non-solicitation – Prevents both parties from poaching each other's employees.
Confidentiality – Ensures that there are legally enforceable obligations towards privacy.
Exclusivity – Stops both parties from negotiating with other entities for a reasonable period, thereby providing an incentive for both parties to complete their negotiations.
Bottom line: letters of intent are not binding, but certain terms are legally enforceable. Therefore, signing a formal contract should be a matter of urgency for both parties.
Letter of intent template
Now that you know a little more about this document's purpose, it may help to look at a letter of intent template. Here's a letter of intent template for the UK (but remember, the real document will need to have much more detail):
Dear [Recipient's Name]
[Introductory paragraph – Provide details about why you are submitting this letter of intent. You should also confirm the names of both parties and provide details about their respective roles.]
[Transaction and timeframes – Next, you should provide a more in-depth description of the transaction. This should include the type of deal you wish to undertake, as well as a preliminary purchase price. This part of the letter of intent should also include timeframes regarding the ongoing negotiation.]
[Contingencies – Here, you can list contingencies that should be met for the negotiation to progress. For example, one widely used contingency is that the deal's closure depends on the buyer's ability to secure financing for the transaction, or that the agreement will only progress if they are satisfied with the due diligence process.]
[Covenants – At this point, you may wish to include sub-agreements regarding non-disclosure, non-solicitation, or exclusivity, which are legally binding.]
[Non-binding confirmation – Here, you should state explicitly that the letter of intent is non-binding for both parties, bar the sub-agreements confirmed in the previous section.]
[Closing date – Finally, you should include a date by which the deal should be concluded. If the deal hasn't been concluded after the closing date passes, then the letter of intent should be considered terminated.]
We can help
GoCardless helps you automate payment collection, cutting down on the amount of admin your team needs to deal with when chasing invoices. Find out how GoCardless can help you with ad hoc payments or recurring payments.