The Pros And Cons Of A Letter Of Intent
The letter of intent is a temporary agreement between the parties. With a letter of intent, you get to record all the key terms of the agreement up to that point. This article serves as a general guide on how to use a letter of intent.
The Pros Of Using A Letter Of IntentIf a letter of intent is well drafted, it can be an instrument to ensure that some parts of the agreement are binding while some other parts are not. The binding parts of a letter of intent include terms on non-solicitation, confidentiality, and exclusive negotiating rights.
The following are some of the advantages of using a letter of intent:
- It provides a clear expectation of the timeframe for concluding the negotiations and the broader transaction.
- It outlines the terms and the structure of the business deal.
- It identifies the key issues that are deal breakers.
- It can also be an instrument preventing the negotiating parties from engaging with other parties at the early stages of the negotiation.
Cons Of A Letter Of IntentIf a letter of intent is not well drafted, it could be mistaken as being binding on the parties. When this happens, parties can incur unintended liabilities and potential damages if the deal isn't completed.
Alternative To A Letter Of IntentDue to the risks associated with a letter of intent, many businesses now make use of a term sheet. A term sheet outlines the basic terms and condition of the business deal. Although the parties do not usually sign the term sheet, it serves as a talking point for further negotiations. It also performs a lot of the other functions of a letter of intent, is simple, and cost-effective.
Drafting a letter of intent or a term sheet requires a bit of legal expertise. To ensure you do not make any costly mistakes, consult with an attorney.