Except in rare cases, the use of a letter of intent is recommended. First, the letter contains certain binding provisions that can give both parties a clearer understanding about the basic terms of the deal. For example, experienced buyers do not want to spin their wheels while the seller shops an offer for their business around to other potential parties. Thus, the buyer may wish to obtain a no-shop agreement from the seller, a provision requiring the seller to refrain from negotiating with other parties for a specified period of time. The letter of intent offers a way to obtain such an agreement early in the negotiations.

 

Second, the parties will have to expend a considerable amount of time and money to complete due diligence and negotiate and draft a purchase agreement for the business. To do so without a clear understanding of the basic terms of the transaction may prove to be a costly error. Thus, the parties may enter into a letter of intent agreement before incurring the expense of negotiating an acquisition or purchase agreement. This will help to provide an additional level of assurance to that negotiations will be successful in the business transaction.

 

Third, although the document is technically not a binding agreement, the execution of the letter often has the effect of creating a moral commitment that will consummate the transaction in accordance with the outlined terms. After announcing the execution of the letter of intent, neither party wants to be the one to walk away without a good reason. A carefully drafted letter can be used to establish initial positions and can be an integral part in leading to a successful transaction of that business.