What is a Letter of Intent?

Definition: A letter of intent is a document that states the interest to complete a given business transaction. It communicates one party’s intention to enter the deal.

What Does Letter of Intent Mean?

Letters of intent are usual in formal business transactions. They are regularly used when the operation is big enough to require advanced legal procedures. When a company is looking for potential corporate buyers or a government agency or entity is bidding a project, letters of intent are normally required to become a participant in the business operation. The letter will describe the conditions being offered for the deal and it normally includes clauses of protection in case the transaction is not completed.

It also transmits in detail the benefits of closing the deal with the party issuing the letter. These letters are regularly the initial step of the business transaction and by no means can they be considered as the actual contract or agreement. The initial conditions might be negotiated by the parties and the letter of intent might become obsolete if new conditions emerge as part of this negotiation process.

Example

A company called Fruit Beverages Co. is looking to buy a fruit supplier called California Lemons Co. The latter is a company that grows and distributes lemons to the entire U.S. West Coast and they have been looking for a buyer for a few months since the company has been struggling financially.

Fruit Beverages Co. recently issued a letter of intent directed to California Lemon’s Board of Directors. The letter stated their interest in buying 60% of the outstanding voting shares at $3 a share. The company also stated in its letter that they will re-structure the company in order to sanitize its debt burden and that will include the incorporation of some new key staff.

Since Fruit Beverages Co. is a big retail producer of fruit juices the deal will benefit California Lemon’s shareholders considerably and this is the reason why the Board is happy with the possibility of completing this deal with them.