Drafting a letter of intent: what should be included

Drafting a letter of intent involves setting out the main outlines of the intended deal and determining for each component whether it is binding. The greatest benefit lies not in beautiful wording, but in a sharp distinction between what binds the parties now (confidentiality, exclusivity, cost allocation) and what applies only after the final contract (purchase price, structure). Anyone who makes this distinction carelessly runs a pre-contractual risk. Below is what should be included and how to structure it.

The short answer

1. Parties and objective: who is negotiating and about what.
2. Outline of the deal: price, structure, and terms in outline (non-binding).
3. Binding provisions: confidentiality, exclusivity, cost allocation.
4. Process and planning: due diligence, timeline, and conditions for progress.
5. Termination arrangement: stipulate that parties remain free to terminate and who bears the costs.
6. Final provisions: applicable law, disputes and the binding versus non-binding clause.

Drafting a letter of intent starts with the structure

A Letter of Intent (LOI) is not a miniature contract, but a framework for negotiation. Therefore, start with the structure and only then work out the details. A useful structure: first the context and objective, then the main commercial points, followed by the binding provisions, and finally the ground rules for the process. By adhering to this order, you prevent binding and non-binding elements from becoming mixed up.

The non-binding parts

You describe the commercial core of the deal in broad outlines and expressly subject to reservation. Consider:

• Price or valuation: an indication or range, with the conditions under which it applies.
• Structure: asset transaction or share transaction, or the arrangement of the collaboration.
• Important conditions: guarantees, personnel to be taken over, financing.
• Suspensive conditions: for example, approval by a shareholder or financier.

Explicitly state for these sections that they are not binding and only apply after the signing of a final agreement. Without that sentence, the other party could argue that a deal was already in place.

The binding parts

There are a number of provisions you specifically want to be binding immediately. These should be clearly formulated in the LOI:

• Confidentiality: what information is confidential, for how long, and with what consequences in the event of a breach. Include a penalty clause if you want the agreement to have teeth.
• Exclusivity: the period during which the seller may not negotiate with others. Determine the duration and whether an extension is possible.
• Cost allocation: who bears the costs of consultants and research, even if the deal falls through. By default, each party bears their own costs.
• Applicable law and disputes: Dutch law and a competent court or arbitration.

Also specify the duration for each binding provision. Exclusivity without an end date is a common mistake that leads to disputes.

The termination clause and pre-contractual risk

Negotiating parties are subject to the regime of reasonableness and fairness (Article 6:2 of the Dutch Civil Code). Case law from the Supreme Court indicates that breaking off negotiations is in principle permitted, but may become unacceptable if the other party had a justified expectation that an agreement would be reached. In such cases, the party breaking off negotiations may be liable for costs and sometimes for lost profits.

You can manage this risk in the Letter of Intent. Include a provision stating that neither party is obligated to continue negotiations and that each party bears its own costs if they break off. This reduces the chance of unintended reliance on the conclusion of an agreement. If, on the contrary, you want certainty that the other party will proceed, do so via an exclusivity clause, not through a vague intention.

A brief practical situation

An SME software company wants to acquire a smaller competitor. When drafting the Letter of Intent, the buyer sets an indicative price, noting that it is non-binding and subject to the outcome of the due diligence. Additionally, he includes a two-month exclusivity clause and a confidentiality clause with a penalty. When the due diligence revealed that revenue was lower than proposed, the buyer was able to adjust the price without legal repercussions, precisely because the price had been set in a non-binding manner.

Honest recommendation

For a straightforward process without sensitive information or exclusivity, you can easily draft a Letter of Intent (LOI) yourself with a solid foundation and common sense. You won't need a lawyer in that case. However, as soon as exclusivity, penalties, or a company to be acquired come into play, the wording of the binding provisions becomes decisive for your position. In that case, have the LOI drafted or reviewed by someone familiar with pre-contractual pitfalls. An unclear exclusivity or confidentiality clause often costs much more than the drafting itself.

Want to read more? View the letter of intent on our contracts page, first read what a letter of intent is, or discover what it costs to have a letter of intent drafted .

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