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What is a Letter of Intent and Why is it Used?

 

A:         Contracts, corporate buy-outs, mergers and other business matters can become very complicated and time consuming for both sides. It may take months or even years to hammer out all of the details surrounding a proposal. Meanwhile, creditors and stockholders may start to wonder if the 'other side' is genuinely interested in completing the process. This is the reason many company representatives draw up a 'letter of intent' early in the negotiating stage.

        A letter of intent is a document which spells out the general plans of an individual or company involved in a business deal. If a large company plans to buy out a small manufacturing plant, for example, a letter of intent might contain a specific date for the proposed sale to take place. A letter of intent might also include plans for expansion or downsizing staff levels or rehiring employees. It is not the same as a legal contract, but an official letter of intent can be treated as a demonstration of good faith.

        One of the major reasons for seeking a letter of intent from the other party is to provide investors with tangible proof of the deal or potential takeover. It is not unusual in the business world to make or receive numerous offers for lucrative deals or contracts. Most of these informal maneuvers never materialize into real agreements. Having a letter of intent allows a company to arrange for additional financing or report the new development to employees and stockholders




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