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Christina Majaski writes and edits finance, credit cards, and travel content. She has 14+ years of experience with print and digital publications.
Updated May 22, 2024 Reviewed by Reviewed by Charlene RhinehartCharlene Rhinehart is a CPA , CFE, chair of an Illinois CPA Society committee, and has a degree in accounting and finance from DePaul University.
Letters of intent lay out the basics of a deal, including cost, time frame, and contingencies. A letter of intent typically encompasses several aspects and it can vary in length according to the level of specificity and the type of transaction.
Like a letter of intent, a memorandum of understanding (MOU) outlines an agreement between two or more parties and is usually produced before a final, formal contract.
A letter of intent is a document that's often used in mergers and acquisitions. It records the preliminary terms of an agreement. The letter of intent is typically nonbinding but it's an important outline of the key terms that the parties involved in the transaction have agreed upon.
The information recorded in the letter of intent ultimately forms part of the definitive purchase agreement that legally sets out the transaction. It outlines what you can and can't talk about outside of that negotiation and it provides a roadmap that describes how things will proceed.
A letter of intent is not typically binding but a U.S. court ruled otherwise in a 2019 decision.
A memorandum of understanding (MOU) is an agreement between two or more parties outlining the terms and details of an understanding, including each party's requirements and responsibilities. It's often the first stage in the formation of a formal contract. It doesn't involve the exchange of money.
The document also usually addresses the timeframes and deadlines for the transaction, as well as the price and method of payment.
Other aspects that may be included in a letter of intent or a memorandum of understanding include:
The letter of intent or memorandum of understanding may outline stipulations for the operation of the business until the date that the business is sold. A drop-dead date is an important clause. This is a point in time when the parties agree to discontinue negotiations if they haven't yet reached an agreement.
Common contingencies include those for licensing, financing, appraisal, and compliance. They can protect your goals and intentions or they can provide you with a legal door out if they're not met.
At least one U.S. court has held that letters of intent can be binding contracts but issues that haven't yet been resolved in the document can still be addressed. The catch is that they should be marked as unresolved in the original letter of intent. An MOU can't or shouldn't be entered without resolution. Both documents should identify any terms that must reach a resolution before the deal is completed.
Yes. A memorandum of understanding is a non-binding agreement between the parties, at least initially. This changes if and when an offer is legally accepted, if it includes a legally binding intention, and if consideration is offered. An MOA is typically a preliminary step toward negotiation of these finer points and sometimes even larger issues.
An MOU is often the same as a letter of intent under U.S. law. A memorandum of understanding, a memorandum of agreement, and a letter of intent are virtually indistinguishable based on American case law. All communicate an agreement on a mutually beneficial goal and a desire to see it through to completion.
MOUs communicate the mutually accepted expectations of the people, organizations, or governments involved. They're most often used in international relations because they can be produced relatively quickly and in secret, unlike treaties. They're also in use in many U.S. and state government agencies, particularly when major contracts are in the planning stages.
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