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A letter of intent (LOI) describes the tentative understanding between two or more parties regarding a certain transaction or business contract. It lays out the fundamental terms and conditions of the proposed transaction and is a non-binding agreement that serves as a starting point for discussions between the parties.
In a letter of intent, the planned transaction is normally described, including the type of business agreement, the assets or shares that will be bought, and the purchase price. It might also specify any conditions or contingencies, including required governmental permissions or due diligence, that must be satisfied before the deal can be finalized. A letter of intent may also contain a secrecy clause that requires the parties to keep the specifics of the proposed transaction private until a final agreement is achieved.
One of the key advantages of a letter of intent is that it permits parties to start discussions and perform due diligence on a possible deal without committing in any way. This can be helpful when parties are still considering a deal and wish to avoid the fees and duties that come with a legally enforceable agreement. It is crucial to remember that a letter of intent does not establish a legally binding agreement or any other duties between the parties.
A letter of intent may occasionally serve as a prelude to a definitive agreement, which is a legally-binding document outlining the specifics of the transaction. The letter of intent could specify that the parties must negotiate in good faith to reach a binding agreement, or it could act as a model for the final contract.
In general, a letter of intent is a helpful document for opening discussions and detailing the fundamental conditions of a proposed deal. It enables the parties to examine a transaction's viability without committing in any way, and by giving the parties a defined starting point for discussion, it helps speed up the negotiating process.
