What is an LOI in business transactions?

An LOI, or Letter of Intent, in business transactions is primarily a document that outlines the key terms and conditions of a proposed agreement between parties. It serves as a nonbinding offer that signals the intention of the parties to move forward towards a formal agreement while laying out fundamental aspects such as price, timeline, and responsibilities. By specifying these core components, an LOI helps to foster mutual understanding and provides a framework for negotiating the detailed terms of a final contract.

In contrast, a list of objectives and intentions does not capture the essence of the specific terms associated with a deal, making it too vague. A summary of risk assessments focuses on evaluating potential risks rather than detailing the terms of an agreement. Finally, referring to a formal contract implies a legally binding document, whereas an LOI is typically understood to be nonbinding, allowing parties to negotiate further without being locked into a final agreement at that stage. This makes the concept of the LOI significant for initial negotiations in business transactions.