What's the Difference Between an LOI and a Sales Contract?

Many companies use a letter of intent (LOI) as part of the sales process. Its purpose is to solidify details before the actual contract is drawn up. LOIs are usually brief, nonbinding agreements that lay out the general terms of a sales agreement. Drafting an LOI should be quick and easy; it gives both sides a chance to study the terms of the deal before they put together a full sales contract. LOIs also allow the seller to offer a price freeze or other concessions before the details of the sales contract are nailed down.

Although LOIs serve a valid purpose — particularly for complex sales — you should use them carefully. Even if an LOI is not legally binding, it still carries weight. If either party renounces the letter, it may breed mistrust or resentment. If you use a letter of intent, keep it brief and direct. Describe the proposed agreement in general terms without covering specific issues. Include a clause that clearly states the LOI is not a binding agreement and that either party may back out at any time. Also, if you use an LOI, make sure the ensuing contract contains a clause stating that no prior documents are binding between the parties.