When you’re exploring a new deal - buying a business, partnering with a supplier, bringing on an investor or negotiating a big customer contract - jumping straight into a long, detailed contract can feel like overkill. That’s where a Letter of Intent (LOI) helps.
An LOI records the key commercial points you’ve agreed in principle, sets the ground rules for negotiations, and helps both sides move forward confidently. Used well, it saves time, reduces misunderstandings and de‑risks your next step.
In this guide, we’ll explain what an LOI is, when to use one, what to include, whether it’s legally binding in Australia, and how to draft and sign it properly. We’ve also included a practical letter of intent sample you can adapt to your situation.
What Is A Letter Of Intent (And When Should Your Business Use One)?
A Letter of Intent is a short document that outlines the key terms two (or more) parties intend to include in a future, more detailed agreement. Think of it as a roadmap for negotiations - it clarifies the headline commercial points and sets expectations.
You’ll typically use an LOI when you:
- Plan to buy or sell a business or assets, before drafting a full Business Sale Agreement.
- Start a significant supply, distribution, or services relationship and want to confirm price, scope and timelines while you prepare the long-form contract.
- Explore investment or funding terms (sometimes alongside a term sheet).
- Negotiate a lease, joint venture or strategic partnership where due diligence and approvals are still pending.
Why use one? LOIs help you align on deal breakers early (price, scope, exclusivity, timelines), protect confidential information, and set rules for how you’ll negotiate. They can also include “binding” parts (like confidentiality or exclusivity) while keeping the commercial terms “non-binding” until the final contract is signed.
Letter Of Intent Vs Heads Of Agreement, Term Sheet And MOU: What’s The Difference?
These documents are closely related and often used interchangeably, but there are subtle differences in how businesses use them:
- Letter of Intent (LOI): A short, plain-English document stating the parties’ intention to proceed and the key commercial terms. Common in business sales, major supply agreements and partnerships.
- Heads of Agreement: Very similar to an LOI, sometimes a little more detailed. Often used when you want a clearer outline of the deal structure and milestones.
- Term Sheet: A concise, usually bullet-point document most common in investment and funding deals. It focuses on valuation, equity, governance and investor rights.
- MOU (Memorandum of Understanding): Broadly records mutual intentions to collaborate. It can be more general than an LOI and is often used by organisations trialling a relationship.
In Australia, the label matters less than the content. The real question is: which parts are intended to be binding? Clear drafting is essential so you don’t accidentally create a binding contract on commercial terms you only meant to explore. If you’re unsure, it can be helpful to use a non-binding LOI to align on key points now, then shift to a binding agreement once the details are finalised.
What To Include: A Practical Letter Of Intent Sample You Can Adapt
Below is a sample Letter of Intent you can tailor to your business. Replace the placeholders and adjust the clauses to match your deal. Remember: every deal is different, so treat this as a starting point, not a one‑size‑fits‑all solution.
LETTER OF INTENT
Date:
Parties:
1. (ABN ) of (Buyer/Partner/Client) (Party A)
2. (ABN ) of (Seller/Partner/Supplier) (Party B)
Purpose:
This Letter of Intent (LOI) sets out the parties’ current intentions and key commercial terms for a proposed (Proposed Transaction).
1. Key Commercial Terms (Non-Binding)
1.1 Structure: .
1.2 Price/Fees: + GST / rate card].
1.3 Scope: .
1.4 Timing: Target signing of final agreement by ; target completion/go-live by .
1.5 Conditions: Completion subject to (a) satisfactory due diligence; (b) third-party approvals; (c) finance (if applicable); (d) board/owner approvals.
1.6 Exclusivity: . If Yes, exclusivity applies from the date of this LOI until (Exclusivity Period).
1.7 Costs: Each party bears its own costs of negotiating and documenting the Proposed Transaction.
2. Confidentiality (Binding)
2.1 Each party must keep confidential all non-public information disclosed in connection with the Proposed Transaction and use it only to evaluate and negotiate the Proposed Transaction.
2.2 Obligations continue for years after the date of this LOI.
3. Good Faith and Process (Non-Binding)
3.1 The parties intend to negotiate in good faith to agree a final written agreement on substantially the terms set out in this LOI.
4. Exclusivity / No-Shop (Binding if ticked in 1.6)
4.1 During the Exclusivity Period, Party B will not solicit, negotiate or enter discussions with any other party regarding a substantially similar transaction.
5. Non-Solicitation (Optional - Binding)
5.1 Neither party will directly solicit the other party’s employees or contractors regarding employment for months, except with prior written consent.
6. Intellectual Property (Binding)
6.1 Each party retains ownership of its pre-existing IP. No licence is granted except as required to evaluate the Proposed Transaction.
7. Governing Law and Jurisdiction (Binding)
7.1 This LOI is governed by the laws of , and the parties submit to the non-exclusive jurisdiction of its courts.
8. Expiry
8.1 This LOI expires on unless extended in writing by both parties.
9. Status of This LOI
9.1 The parties agree that clause 2 (Confidentiality), clause 4 (Exclusivity, if applicable), clause 5 (Non-Solicitation, if included), clause 6 (IP), clause 7 (Governing Law), and this clause 9 are legally binding.
9.2 All other provisions are statements of current intention only and are not legally binding.
Signed for and on behalf of Party A:
Name:
Title:
Signature:
Date:
Signed for and on behalf of Party B:
Name:
Title:
Signature:
Date:
Customise the sections to suit your deal. For example, in a business purchase LOI, add a short list of assets included (stock, plant, IP, customer contracts). In a services LOI, add a high-level scope, service levels and fee model. If you’re sharing sensitive information, you may also want a standalone Non-Disclosure Agreement for extra protection.
Is A Letter Of Intent Legally Binding In Australia?
The short answer: parts of it can be binding - but only if you draft it that way.
Most LOIs are intended to be non-binding on the headline commercial terms. At the same time, businesses often want certain provisions to be binding immediately, like confidentiality, exclusivity, governing law, non-solicitation and sometimes a break fee.
Courts look at the wording and context. If your LOI reads like a complete contract (clear offer, acceptance, consideration and intention to create legal relations), it may be treated as binding even if it’s called an LOI. This is why it’s important to understand the basics of offer and acceptance and to include a clear “status” clause stating which parts are binding and which are not.
Also be careful with exclusivity and “agreement to agree.” A well-drafted exclusivity clause can be binding. But a vague commitment to agree later usually won’t be enforceable. If you intend to lock in more than process and protections, consider moving to a more detailed, partially binding Heads of Agreement or a full contract.
How To Draft, Sign And Manage Your LOI (Step‑By‑Step)
1) Align Internally On Your Deal Priorities
Before you put anything in writing, get clear on your must-haves, nice-to-haves and deal breakers. Price, scope, timing, due diligence, approvals, and any need for exclusivity should be decided internally so you negotiate from a consistent position.
2) Decide Which Clauses Should Be Binding Now
Most small businesses choose to make confidentiality, exclusivity (if any), IP ownership, governing law and the “status” clause binding at LOI stage. Keep the commercial terms non-binding until the final agreement is executed, to preserve flexibility while you complete due diligence.
If you need a concise bullet point list (common for investment deals), a Term Sheet might be better. If the commercial detail is more developed and you want a slightly fuller outline, consider a Heads of Agreement. If you are heading toward buying a business, your LOI should pave the way for a Business Sale Agreement with clear conditions precedent, completion deliverables and warranties.
4) Draft Clearly And Keep It Short
Use plain English and short clauses. Label sections “Binding” or “Non‑Binding.” Avoid vague promises. If you include an exclusivity period, set a realistic end date. If you need to share detailed information, add or attach a separate Non-Disclosure Agreement so your confidential information is properly protected from day one.
5) Watch For Common LOI Pitfalls
- Accidentally binding the whole deal: If the LOI looks like a complete agreement, you may be bound. Use an explicit “status” clause.
- Exclusivity without guardrails: Limit exclusivity to a short window, and tie it to reasonable milestones (e.g. access to data rooms, management interviews, due diligence timetable).
- Missing process and timelines: If you want momentum, include a target signing date, key steps and who’s responsible for drafts.
- Silence on costs: State that each party pays its own costs unless you’ve agreed otherwise.
- Unclear IP and data handling: Confirm who owns pre‑existing IP and how data will be used and returned if negotiations stop.
6) Execute Properly
Have the LOI signed by authorised signatories. For companies, consider signing under section 127 of the Corporations Act to make execution straightforward and reliable. If you’re signing digitally, make sure your process complies with Australian law and your counterpart’s requirements around electronic signatures.
7) Move Quickly To The Final Contract
An LOI is a bridge - don’t live on it. As soon as you’ve aligned on the high‑level terms and completed due diligence, move to the long-form contract. For complex deals, a staged approach can help: LOI → partially binding Heads of Agreement → final agreement.
If the deal evolves, you can also amend a contract or update the draft to reflect new information. Keep track of versions and agreed changes to avoid confusion.
8) Examples: What Changes By Deal Type?
- Business purchase: Include deal structure (asset or share sale), headline price and adjustments, deposit (if any), due diligence scope, key employee arrangements and target completion date - all paving the way for a comprehensive Business Sale Agreement.
- Major supply agreement: Cover product range/services, pricing model, service levels, delivery windows, exclusivity, and transition timeline before preparing the long‑form services or supply agreement.
- Investment/term sheet: Focus on valuation, instrument type (equity vs. convertible), governance rights and investor protections; use a term sheet format, then move to full documents.
- Partnership/JV: Outline purpose, contributions, governance and profit‑sharing at high level, then convert to a detailed JV or partnership agreement.
9) What Happens If Negotiations Fall Over?
If the deal doesn’t proceed, binding parts of the LOI (confidentiality, exclusivity, IP handling) still apply. Return or destroy confidential information as agreed. If you’ve already started transferring assets or services based on the LOI, you may need to unwind or formally assign arrangements - speak with a lawyer about transition steps and whether an interim instrument (like deed or assignment) is required instead of relying on informal emails or verbal assurances.
Remember, calling something an LOI doesn’t automatically make it non-binding. The content, clarity and conduct of the parties will matter just as much as the title. If in doubt about whether you’ve crossed from “intention” to “agreement,” revisit the basics of offer and acceptance and make sure the final, binding version is the one that’s signed properly.
Key Takeaways
- A Letter of Intent helps you lock in headline terms, protect confidentiality and set negotiation rules while you prepare the final contract.
- Be crystal clear about which clauses are binding (e.g. confidentiality, exclusivity, governing law) and which commercial terms are non-binding.
- Choose the right format for the stage you’re at - an LOI, a Heads of Agreement or a term sheet - and progress promptly to the long‑form agreement.
- Execute your LOI correctly, for example by signing under section 127 or using compliant electronic signatures.
- Use our sample LOI as a starting point, but tailor it to your deal and consider a separate Non-Disclosure Agreement if you’ll share sensitive information.
- When you’re ready, move to the definitive agreement (for example a Business Sale Agreement) and keep a clean record of any changes if you need to amend a contract.
If you’d like a consultation on preparing a Letter of Intent for your next deal, you can reach us at 1800 730 617 or team@sprintlaw.com.au for a free, no-obligations chat.
