What is a Letter of Intent?

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 that 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, the letter might contain a specific date for the proposed sale to take place. It 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 this document allows a company to arrange for additional financing or report the new development to employees and stockholders.

The term "letter of intent" can also apply to other areas besides business and industry. Recruiters for collegiate sports teams will often visit prospective players at home in order to promote their school's athletic program. Typically, a very talented athlete receives a number of these visits from rival schools. At some point before the beginning of the school year, the player must sign a letter of intent that indicates his or her future plans. Having a star prospect sign this letter for a specific school is often seen as a great success for the recruiter.