Whether you’re selling your business or purchasing one, two documents you may see referenced are letters of understanding (also known as notes or memos of understanding) and letters of intent. Sometimes the terms "letter of intent" and "memo of understanding" are used interchangeably, but there are differences between the two documents.
When it comes to a memo of understanding vs. a letter of intent, the main difference between the two is that a memo of understanding applies to multiple parties, while a letter of intent typically applies to just two.
What Is a Letter or Note of Understanding?
A letter of understanding is a form of written agreement. It outlines the specifics of an understanding and is often used to detail the terms of a sale. A letter of understanding is usually written before a formal contract is drafted. It should be thorough and describe the responsibilities of both parties when it comes to the transaction.
A note of understanding is often used in negotiations that include representatives from different countries. Since they are not legally binding, they don’t have to meet any country’s legal requirements.
Writing a Letter of Understanding
There is no one-size-fits-all letter of understanding template. In fact, another way that a memo of understanding is different from a letter of intent is that all parties are involved in drafting the letter. This could mean some lengthy discussions need to take place before a letter of understanding can be drafted.
When it comes to business transactions, a letter of understanding typically includes the time frame for the transaction, the price of the business and how it is going to be paid. It may also list the business’s liabilities and assets so each party is aware of what is being purchased. It may also include requirements that the seller needs to meet for the business to be sold.
Although a note of understanding is not legally binding, it still doesn’t hurt to run it by your legal adviser who may be able to point out potential issues.
What Is a Letter of Intent?
A letter of intent spells out the intent of one party to do business with another party. They are often used when buying a business, but letters of intent also have non-business purposes, such as formally accepting a job offer.
In the business world, a letter of intent is a precursor to a contract. It shows the buyer is serious, and it may include a nondisclosure agreement, where both parties agree not to discuss the details of the letter of intent.
Writing a Letter of Intent
In most cases, a letter of intent is written by one party and then forwarded to the other for review. The other party may counter with a new version of the letter of intent. In some cases, the parties may work on a draft together, but that is less common than it is with a note of understanding.
Typically, a letter of intent will include:
- The names of both parties
- The details of the purchase, including purchase price and any terms and conditions
- The financing details, such as whether the purchase is being made with stock or cash.
- The deadline for completion of the sale
- Clauses for if the deal falls through
You can find templates for letters of intent online, but the best route would be to consult with an experienced attorney. Even though the letter of intent isn’t legally binding, an attorney can help you clarify your language and ensure your letter covers everything it needs to cover.