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A Letter of intent is likely to encompass a number of different aspects, and it varies in length according to the level of specificity and the type of transaction. All letters of intent lay out the basics of a deal, including cost, time frame and contingencies. Like a letter of intent, a memorandum of understanding outlines an agreement between two or more parties and is usually produced before a final, formal contract. The primary difference between the two is that a letter of intent is not binding, whereas a memorandum of understanding is considered binding and carries weight in a court of law.

What Is a Letter of Intent?

A letter of intent is a document, often used in mergers and acquisitions, that records the preliminary terms of an agreement. Though the letter of intent is nonbinding, it is an important outline of the key terms that the parties involved in the transaction have been agreed upon.

Ultimately, the information recorded in the letter of intent forms part of the definitive purchase agreement that legally sets out the transaction — it outlines what can and can’t be talked about outside of that negotiation, and it provides a roadmap that describes how things will proceed.

What Is a Memorandum of Understanding?

A memorandum of understanding is an agreement between two or more parties outlining the terms and details of an understanding, including each parties’ requirements and responsibilities. It is often the first stage in the formation of a formal contract, and does not involve the exchange of money.

Letter of Intent vs. Memorandum of Understanding

A letter of intent or memorandum of understanding may serve a number of purposes. Such a document is likely to identify any terms that need to reach resolution before completing the deal. The document also usually addresses the time frames and deadlines for the transaction, the price, and the method of payment. Other aspects that may be included in the letter of intent or memorandum of understanding include warranties of marketable title, a list of total liabilities and total assets, and operating condition of all equipment and machinery at the time of purchase.

The letter of intent or memorandum of understanding may outline stipulations for the operation of a business until the date the business is sold. A drop-dead date is an important clause; this is a point in time when the parties agree to discontinue negotiations if they haven’t reached an agreement.

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