Alex is Sprintlaw's co-founder and principal lawyer. Alex previously worked at a top-tier firm as a lawyer specialising in technology and media contracts, and founded a digital agency which he sold in 2015.
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If you’re negotiating a deal - buying a business, partnering with another company, or entering a major supply arrangement - you’ll often want to “get something down on paper” before drafting the full contract. That’s where a letter of intention (LOI) comes in.
A well-drafted LOI helps both sides agree on the key commercial points and a timeline. It can also set the ground rules for the negotiation (think confidentiality and exclusivity) so your interests are protected while you do due diligence.
In this guide, we’ll explain what a letter of intention is in Australia, when to use one, whether it’s binding, what to include, and how it compares to similar documents like a Heads of Agreement, Memorandum of Understanding and Term Sheet.
What Is A Letter Of Intention (LOI)?
A letter of intention (often called a letter of intent) is a short document that outlines the key terms the parties agree in principle during early negotiations. It’s typically used to set a framework for finalising a detailed contract.
In Australia, an LOI can be used across many deals - from a business purchase to a strategic partnership. The aim is clarity and momentum: both sides know the commercial “headline” terms and how the process will run without waiting for the full legal drafting.
Importantly, an LOI can be binding, non-binding, or a mix. Most businesses want the commercial terms to be non-binding (so you can walk away if due diligence raises issues), while certain provisions - like confidentiality, exclusivity and governing law - are usually binding.
When Should Your Business Use A Letter Of Intention?
Consider using an LOI when you:
- Need to capture a deal outline quickly to keep negotiations moving.
- Want exclusivity (so the other side doesn’t shop the deal while you invest time and cost in due diligence).
- Need confidentiality locked in before sharing sensitive financials, IP or customer information.
- Plan to run a structured process (milestones, due diligence scope, draft contract timeline, completion date).
- Have key commercial variables to test (price, payment structure, conditions precedent) before spending on full drafting.
Common scenarios include buying or selling a business, exploring a joint venture, lining up a significant supply/distribution arrangement, or stepping through a franchise grant process. Where the parties want a bit more structure than a letter but not the full contract yet, a Heads of Agreement is another popular option.
Is A Letter Of Intention Legally Binding?
It depends on how it’s drafted.
Australian courts look at the document’s wording and the parties’ intentions. If your LOI says the commercial terms are “subject to contract” or “non-binding,” that’s a strong sign you don’t intend to be legally bound to complete the deal until a formal contract is signed.
However, clauses like confidentiality, exclusivity/no-shop, costs, good faith negotiation, and governing law can be expressed as binding - and courts will generally enforce those if the language is clear.
To avoid confusion, your LOI should clearly separate binding and non-binding sections. Many businesses include a short “Binding Nature” clause that says exactly which provisions bind the parties now and which do not.
What Should A Letter Of Intention Include?
There’s no one-size-fits-all, but most LOIs cover the key commercial points and process. Consider including:
- Parties and Purpose: Who’s involved and what the proposed transaction or partnership is.
- Scope of Deal: High-level description of what’s being bought/sold/licensed or what services/activities are covered.
- Price and Payment Structure: Headline price, deposit or milestones, earn-outs, or equity components if any.
- Conditions Precedent: What must happen before a binding contract or completion (e.g. due diligence, finance, board approval, landlord consent).
- Due Diligence: Scope, access to information, timeline and responsibilities.
- Exclusivity (No-Shop): Whether the seller/other party will refrain from negotiating with others for a defined period.
- Confidentiality: Protection of information exchanged - note this is often binding from day one.
- Timelines: Milestones for due diligence, contract drafting, and indicative completion date.
- Costs: Who pays legal/transaction costs; whether each party bears its own costs.
- Binding Nature: A clear statement on which provisions are binding vs non-binding.
- Governing Law and Jurisdiction: Usually the state or territory where you operate.
If you’ll be sharing sensitive information right away, it’s common to back up the LOI with a standalone Non-Disclosure Agreement so your confidentiality protections are robust.
LOI vs Heads Of Agreement vs MOU vs Term Sheet: What’s The Difference?
These documents often do a similar job - capture agreed in-principle terms early - but there are subtle differences in how they’re used.
- Letter of Intention (LOI): A short letter-format summary of the proposed deal and process. Often used for acquisitions, major supply deals and partnerships. Can mix binding and non-binding terms.
- Heads of Agreement: A bit more structured than an LOI and commonly used across a wide range of commercial deals. Like an LOI, it can include binding and non-binding sections.
- Memorandum of Understanding (MOU): Typically used to express a general understanding of cooperation, sometimes at an earlier or more exploratory stage. Usually non-binding on commercial terms unless specified.
- Term Sheet: A concise, bullet-point style list of the key commercial terms - often used in investment and capital raising deals. Commonly non-binding other than confidentiality and exclusivity.
In practice, the name matters less than the content. What’s crucial is making your intentions clear so you don’t accidentally create a binding obligation to complete the deal before you’re ready.
How To Draft A Clear Letter Of Intention (Step-By-Step)
1) Confirm The Commercial Headline Terms
Start by aligning on the essentials: what’s being bought/sold or agreed, the price and payment structure, and the key conditions. Keep it high level at this stage.
2) Map The Process And Timelines
Set out a realistic timetable for due diligence, draft contract preparation, approvals, and target completion. This helps manage expectations and keeps momentum.
3) Decide What Should Be Binding Now
Choose whether confidentiality, exclusivity, costs and governing law will bind the parties immediately. If yes, mark those clauses as binding and the rest as non-binding.
4) Build In The Right Protections
Include a confidentiality clause, or pair your LOI with a standalone Non-Disclosure Agreement. If you need a clear “no-shop” period to protect your investment of time, add an exclusivity clause with a specific end date.
5) Keep It Plain And Specific
Avoid vague language. Use clear, simple terms and define key concepts if needed. Ambiguity is where most LOI disputes arise.
6) Plan The Next Document
Signal what the final form agreement will be (for example, a Business Sale Agreement, supply agreement, or joint venture agreement) and who will prepare the first draft. If you’ll bring on co-founders or investors, think ahead about a Shareholders Agreement as part of your broader deal plan.
Common Use Cases For Letters Of Intention
Buying Or Selling A Business
An LOI is frequently the first step in a business sale. You’ll outline price, assets to be transferred, key employees, and conditions precedent like finance, due diligence, or landlord consent. After due diligence, the parties move to a detailed Business Sale Agreement.
Franchising Discussions
Franchisors and prospective franchisees may agree high-level terms and a process (including disclosure) before finalising a Franchise Agreement. Exclusivity periods can be useful so both sides can focus on the opportunity.
Partnerships And Joint Ventures
Where two businesses plan to collaborate, an LOI captures the objectives, contributions, IP ownership, and next steps. If you’ll create a new company for the venture, plan for a Shareholders Agreement to formalise how decisions are made, equity is held, and disputes are resolved.
Supply And Distribution
For significant supply or distribution deals, an LOI can frame pricing, volume commitments, territory and minimum terms while you negotiate a full supply or reseller agreement.
Key Legal Issues And Risks To Watch
Accidentally Binding Yourself
If you use language like “the parties agree to proceed” without a “subject to contract” or non-binding qualifier, a court could find you intended to be bound. Be explicit about the non-binding nature of the commercial terms until the final contract is signed.
Exclusivity Risks
Exclusivity is powerful, but it also restricts your options. Keep exclusivity periods reasonable and clearly limited by time and scope (for example, limited to negotiating this specific transaction).
Confidentiality Gaps
If confidentiality matters, make it binding and define what’s protected, for how long, and permitted uses. Consider a standalone Non-Disclosure Agreement where sensitive IP, customer data or pricing models are involved.
Unclear Conditions Precedent
Be precise about the conditions that must be satisfied before a binding contract or completion. For example: satisfactory due diligence (define the scope), funding approval, or third-party consents.
Competition And Consumer Law
If your proposed arrangement could impact market competition or consumer rights, ensure your LOI and the final deal align with Australian Consumer Law (ACL) and any other applicable regulations.
Should I Use A Template Or Get Legal Help?
Templates can be a handy starting point, but small differences in wording can have big legal consequences - especially around binding vs non-binding clauses, exclusivity and confidentiality. It’s worth getting an LOI reviewed or drafted properly if the deal is material to your business.
If you expect to move quickly from LOI to a formal contract, consider whether a Heads of Agreement or Memorandum of Understanding makes more sense for your situation, or if your context calls for a concise Term Sheet (for example, in an investment). We can also help you transition from the LOI into the right final document, such as a Business Sale Agreement or a Franchise Agreement.
Key Takeaways
- A letter of intention (LOI) records agreed in-principle terms and the negotiation process so both parties can proceed with clarity.
- In Australia, an LOI can be binding, non-binding or a mix - make it crystal clear which clauses are binding now (often confidentiality, exclusivity and costs) and which are not.
- Include the essentials: parties, scope, price and payment, conditions precedent, due diligence, timelines, confidentiality, exclusivity and governing law.
- Choose the right format for your context - LOI, Heads of Agreement, MOU or Term Sheet - and avoid vague or conflicting wording.
- Plan for the next step early, whether that’s a Business Sale Agreement, supply agreement, or a Shareholders Agreement if you’re forming a new venture.
- Get tailored legal input for material deals - small drafting choices in an LOI can significantly change your rights, obligations and leverage.
If you’d like a consultation on drafting or reviewing a letter of intention for your business, you can reach us at 1800 730 617 or team@sprintlaw.com.au for a free, no-obligations chat.
