Key Takeaways

  • A letter of intent to purchase (LOI) is a non-binding document outlining preliminary terms before drafting a legally binding purchase agreement.
  • LOIs help establish good faith, clarify major deal points (price, timing, contingencies), and provide reassurance to both buyer and seller.
  • While generally non-binding, certain provisions—like confidentiality, exclusivity, or governing law—can be enforceable.
  • LOIs are widely used in business acquisitions, real estate transactions, and asset or share purchases, serving as a roadmap for negotiations.
  • A well-drafted LOI should include clear terms, identify all parties, outline due diligence procedures, and specify what is binding vs. non-binding.

What Is a Letter of Intent?

A letter of intent (LOI) is a letter outlining the understanding between two different parties. However, an LOI is not legally binding, which means that the parties aren't obligated in a legal manner to go through with the terms outlined in the agreement. An LOI is the foundation for what will become a definitive and legal agreement. When the parties agree to the LOI, this action is a step in the negotiations process that shows good faith between them.

You might use an LOI when starting the process of buying shares or assets from another company. This LOI would then transition into a Purchase of Business Agreement, which is the legal way to take this type of action. Letters of intent are not legally binding to either party but rather used as an expression of intent by one or both parties to continue good faith business negotiations.

Purpose of a Letter of Intent to Purchase

The purpose of a letter of intent to purchase is to ensure both parties have a shared understanding before investing significant time and resources in a transaction. It serves as an “agreement to agree”—laying out the framework of the deal while signaling serious interest. For buyers, it can help secure priority in negotiations by discouraging the seller from engaging with other prospects. For sellers, it demonstrates that the buyer is committed and capable of following through.

LOIs are especially valuable in transactions involving complex assets, intellectual property, or ongoing business operations, as they help establish expectations early on. By clarifying intent upfront, parties can avoid costly misunderstandings later in the process.

Terms of a Letter of Intent

Sellers and buyers will often use letters of intent to show proof of the agreement on terms of a specific transaction. Those terms might include:

  • Closing date
  • Price
  • Due diligence period
  • Financing
  • Other important points

When one party signs an LOI, this action can offer some comfort and reassurance to the other party that the deal is in motion and the parameters are being further clarified. The LOI allows the involved parties to proceed in the process, such as by drafting a contract or moving into the due diligence timeframe of the deal.

Some of the aspects that are often excluded from an LOI, such as the boilerplate and specific details of the transaction, will be addressed during the stage of drafting the contract. All involved parties and their attorneys should be involved in this stage. Although an LOI is not legally binding, many of these documents contain provisions that become binding, such as those around marketing, confidentiality, and exclusivity negotiations. When a party signs or sends an LOI, this action shows a sincere intent to carry out and act upon the terms outlined in the document.

Binding vs. Non-Binding Provisions

Although an LOI is primarily non-binding, it often contains mixed provisions—some binding, some not. Binding clauses typically include:

  • Confidentiality: Restricting disclosure of sensitive financial or business information.
  • Exclusivity (No-Shop Clauses): Preventing the seller from negotiating with other potential buyers during a set period.
  • Governing Law: Establishing the jurisdiction that will apply to disputes.

Non-binding terms usually cover the purchase price, financing structure, due diligence, and closing timeline. Clearly distinguishing which provisions are binding helps avoid disputes and sets realistic expectations for both sides.

Use in Business Transactions

Letters of intent are used in a variety of business transactions, but the most common uses involve the sale or purchase of assets or shares between parties. An LOI is also used to show interest in purchasing or leasing a property. Any of the involved parties in a business deal can prepare and send an LOI to show their intent and set out the initial terms of the transaction.

For example, if a buyer is interested in purchasing a business, that buyer might send an LOI to the owner of the business. Upon receiving the LOI, the business owner can review the terms and make a decision about whether to move forward with selling the business or start the process of negotiating the terms before drafting a contract. If the terms in the LOI are agreeable to the business owner, the next step would be approving the letter and moving forward to the stage of drafting a contract for the business transaction.

When entering into a business transaction with an LOI, the letter should outline important terms:

  • Purchase price
  • Information about the seller and buyer
  • Transaction description (location of a property, size of land, type of purchase, etc.)

The LOI might include several other common clauses, such as:

  • Transaction contingencies
  • Due diligence period and process
  • Exclusivity or confidentiality clauses

In a real estate or other business transaction, an LOI provides details and terms of the purchase to start the process. Since an LOI isn't legally binding, using one is the first step before entering into a contract that is legally binding. The seller in the transaction can review the terms of the LOI and evaluate options before agreeing to the buyer's terms. Using an LOI can help all involved parties save on costs associated with due diligence, negotiations, and other legal steps.

A document that outlines the terms of a preliminary agreement to purchase assets, shares, or other items is called a letter of intent for purchases.

How to Write an Effective Letter of Intent to Purchase

An effective LOI should be clear, concise, and tailored to the transaction at hand. Essential elements include:

  1. Identification of Parties – Names and roles of buyer and seller.
  2. Description of the Transaction – Whether the purchase involves assets, shares, or property.
  3. Proposed Purchase Price and Payment Terms – Including structure (cash, financing, or installments).
  4. Due Diligence Timeline – How long the buyer has to review records and evaluate the deal.
  5. Contingencies – Conditions that must be met, such as financing approval or regulatory clearance.
  6. Closing Date – The anticipated timeframe for finalizing the agreement.
  7. Binding Clauses – Confidentiality, exclusivity, or dispute resolution provisions, if applicable.

The LOI should be written in professional business language but avoid excessive legal jargon, since its goal is to foster cooperation and good faith between the parties.

Frequently Asked Questions

  1. Is a letter of intent to purchase legally binding?
    Generally, no. Most terms are non-binding, but clauses on confidentiality or exclusivity can be legally enforceable.
  2. What is the difference between a letter of intent and a purchase agreement?
    An LOI sets out preliminary terms and intent, while a purchase agreement is a legally binding contract finalizing the deal.
  3. Do I need a lawyer to draft a letter of intent to purchase?
    While not legally required, having a lawyer review the LOI ensures clarity on binding terms and protects your interests.
  4. Can a seller back out after signing a letter of intent?
    Yes, unless the LOI contains binding provisions. However, walking away may affect goodwill or future negotiations.
  5. When is a letter of intent to purchase most useful?
    It’s most valuable in complex business sales, mergers, acquisitions, and real estate deals where parties need clarity before drafting a final contract.

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