• Non-binding provisions - A letter of intent is a summary of the principal terms of a deal that have been agreed to between a buyer and seller. It will normally include the price, the form of the transaction (typically a stock deal, an asset deal or a merger), what is included and excluded from the deal, and a closing date. There are a host of other provisions, too numerous to mention, that can go into a letter of intent. The key aspect to a letter of intent is that it is a non-binding statement of the intention of the parties and thus subject to change and renegotiation.
  
  
• Binding provisions - While the bulk of most letters of intent are non-binding, there is often a binding provision that is also included that requires the seller to stop any further discussions or negotiations with other potential buyers and to refrain from having any discussions with such potential buyers in the future (we will refer to this as a "no-shop" provision). This provision is often the only part of the letter of intent that has any legal effect.
  
  

What is the purpose of a letter of intent?

A letter of intent that serves solely as a recitation of the terms of the deal and is completely non-binding can be a useful tool to put down in writing the agreement that has been reached. Used in this fashion, it is largely a neutral document, not giving any negotiating advantage to either side.

In order to see how a letter of intent can be used or not used to the advantage of one side or the other, you must look at the context of the negotiations that have taken place so far to determine its value as a means to improve one side's negotiating position.

From the buyer's perspective

If the buyer is one of several potential buyers that the seller has been talking to, a letter of intent having a binding "no shop" provision can be very important. When a buyer is competing with several others, it can be very valuable to have the seller agree to stop any further discussions with the others and to not entertain any more offers during the period of the no shop agreement. The longer this binding provision is in effect, the better. It is here where a buyer can secure an advantage in its dealings with the seller through the use of a letter of intent.

From the seller's perspective

If a seller is negotiating with several potential buyers, an agreement to a binding "no-shop" provision can have a negative impact on its future negotiating leverage. Because of this, many sellers will not go to a letter of intent, opting instead to go directly to the drafting and negotiation of the formal contract, in many cases negotiating a contract with more than one potential buyer before making any commitment to sell to anyone in particular. This obviously works to the advantage of the seller and also speeds up the process immensely. If a letter of intent is entered into with a binding "no shop" provision, a seller will normally try to negotiate as short a time limit on this provision as possible.

More often than not, a letter of intent is advantageous to a buyer if it can get a binding "no-shop" provision. More often than not, a seller with an attractive business for sale is better off skipping a letter of intent and going directly to contract. Every deal is different however, and there are an infinite number of variations that may exist in any specific situation. In order to determine whether a letter of intent should be used or the parties should go directly to a contract, each site must determine what leverage it has just prior to a letter of intent, and whether a letter of intent will enhance its leverage, detract from it, or be neutral.