Letter of Intent
What it is:
A letter of intent is a non-binding document detailing a planned action on the part of an organization or individual.
How it works/Example:
A letter of intent is often drafted by companies in relation to a deal or transaction with another company, such as a merger. It is meant to summarize, in a non-binding manner, a company's intended action and the envisioned steps required to carry out the action. A letter of intent may precede a formal binding agreement as a preliminary plan of action and expression of interest. For instance, a company might issue a letter of intent to another company as a serious proposal of a deal or partnership.
Why it matters:
Mergers and other business transactions can be complex and take years to execute. Letters of intent, though not legally binding, can add clarity to the process by providing the key points of a transaction. They also provide investors with tangible proof and information about the potential business transaction.