Letter of Intent vs. Memorandum of Understanding: What's the Difference?

Letter of Intent vs. Memorandum of Understanding: An Overview

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.

Letter of Intent

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.

Memorandum of Understanding

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 Terms and Conditions

Other aspects that may be included in a letter of intent or a memorandum of understanding include:

• Warranties of marketable title
• A list of total liabilities and total assets
• The operating condition of all equipment and machinery at the time of purchase

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.

The Bottom Line

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.