Manufacturing Agreement: What To Review Before Signing

Many US founders and business operators will encounter a letter of intent (LOI) at some point, whether you are selling your company, entering a joint venture, or negotiating a major contract. The LOI is often the first written step in a deal, but using the wrong format or missing key terms can lead to confusion, legal risk, or even an accidental binding contract. Some business owners rush to sign or send an LOI without fully understanding what it means, what questions to ask, or how state law could affect the outcome. This guide explains the practical format for a letter of intent, highlights common mistakes, and outlines what you should know before you send or sign one. We also cover when to seek attorney review and how to protect your business interests at this critical stage.

What Is a Letter of Intent and When Is It Used?

A letter of intent is a document that sets out the main points of a proposed business deal before the parties sign a final, binding agreement. LOIs are common in business sales, mergers, acquisitions, joint ventures, investments, and large commercial contracts. The LOI summarizes the key commercial terms, clarifies expectations, and can help move negotiations forward by getting both sides on the same page.

LOIs serve several practical purposes:

• They help parties determine if there is enough agreement on key terms to justify moving forward with due diligence and drafting a final contract.
• They can show good faith to investors, boards, or lenders who may require an LOI before releasing funds or approving a deal.
• They can grant temporary protections, such as confidentiality or exclusivity, while negotiations continue.

However, LOIs can also create legal risk if not handled carefully. Some are intended to be non-binding, serving only as a summary of terms. Others include binding provisions, such as confidentiality, exclusivity (no-shop), or break-up fees. If the format for a letter of intent is unclear, or if the parties act as if a deal exists, a court could find the LOI to be a binding contract in whole or in part.

For example, a startup founder in Texas negotiating a company sale may send an LOI to a potential buyer. The LOI lists the price, payment structure, due diligence period, and states it is non-binding except for confidentiality and exclusivity. In contrast, a New York company entering a joint venture may sign an LOI outlining contributions and governance, but both sides agree that neither is legally bound until a final agreement is signed.

At the federal level, there are no specific laws governing LOIs. Instead, state contract law determines whether an LOI is binding or enforceable. Some states, like Delaware and New York, are more likely to enforce LOIs if the language is ambiguous or if the parties act as if a deal is in place. Others, like California, may look more closely at the parties' intent and conduct. Always check the relevant state law before relying on an LOI, and consider industry-specific rules that may apply (for example, in healthcare or finance).

Key Elements in the Format for Letter of Intent

There is no single required format for a letter of intent, but most LOIs include certain key elements. Using a clear, organized format helps prevent misunderstandings and legal disputes. Here is a practical checklist of what to include in your LOI:

• Introduction: Identify the parties involved, the purpose of the LOI, and the nature of the proposed transaction.
• Summary of Key Terms: List the main commercial terms, such as purchase price, payment structure, assets or shares to be transferred, due diligence process, and timeline.
• Binding vs. Non-Binding Clauses: Clearly state which provisions are intended to be binding (for example, confidentiality, exclusivity, governing law) and which are not (such as the deal terms themselves).
• Conditions to Closing: Outline any conditions that must be satisfied before a final agreement is signed, such as board approval, financing, regulatory clearance, or satisfactory due diligence.
• Confidentiality: Specify whether negotiations and deal terms must be kept confidential, and for how long.
• Exclusivity (No-Shop): State whether the parties agree not to negotiate with others for a set period, and what exceptions apply.
• Termination and Expiry: Set out when the LOI expires, how it can be terminated, and what happens to any binding obligations if the deal does not proceed.
• Governing Law: Identify which state's law applies to the LOI and any disputes arising from it.
• Signatures: Include signature blocks for authorized representatives of each party, with printed names, titles, and dates.

Some LOIs also include a schedule or appendix with more detailed terms, or a statement that the LOI is subject to further negotiation and execution of a definitive agreement. Using clear headings, bullet points, and plain language makes the LOI easier to read and reduces the risk of confusion. Avoid legal jargon unless both sides understand it and it is necessary for the deal.

Here is a simple example of how a section in an LOI might look:

Confidentiality: The parties agree to keep the terms of this LOI and all related negotiations confidential for a period of 12 months from the date of this LOI, except as required by law or with the other party's written consent. This section is binding.

Always tailor the LOI to your specific deal, industry, and state law. A template can be a starting point, but it should not be used without customization and review.

Common Mistakes and Risks With Letters of Intent

Many business owners make mistakes with LOIs that can lead to legal disputes, lost deals, or unintended obligations. Here are some of the most common pitfalls to watch for:

• Unclear Binding Status: Failing to specify which parts of the LOI are binding and which are not. Courts in some states may treat the entire LOI as binding if the language is ambiguous or if the parties act as if a deal exists.
• Missing Key Terms: Leaving out important commercial terms, such as price, payment structure, or conditions to closing, which can lead to misunderstandings or disputes later.
• Overly Detailed or Too Vague: Including too much detail can make the LOI look like a final contract, while being too vague can make it unenforceable or useless as a negotiation tool.
• No Expiry or Termination Clause: Not setting an end date or termination process can leave the LOI open indefinitely, creating uncertainty and risk.
• Ignoring State Law Differences: Not accounting for state-specific contract law, which can affect enforceability and interpretation. For example, New York courts may enforce an LOI if the parties have agreed on all material terms, even if they intended to sign a more formal agreement later.
• Failing to Get Legal Review: Not having an attorney review the LOI, especially for high-value or complex deals, can expose you to unnecessary risk.
• Acting on the LOI Before Final Agreement: Starting to perform parts of the deal (such as transferring assets or sharing sensitive information) before a final contract is signed can create legal obligations or weaken your negotiating position.

For example, a founder in Illinois signed an LOI with a buyer, thinking it was non-binding. However, the LOI did not clearly state this, and both parties began due diligence and exchanged confidential information. When the deal fell apart, the buyer sued, claiming the LOI was a binding contract. The court looked at the language and the parties' actions, and the founder faced costly litigation.

To avoid these risks, always use a clear format for your LOI, review the terms carefully, and consult a licensed attorney when in doubt. If you are unsure about the legal effect of your LOI, professional advice can help you avoid accidental contracts or missed protections.

Here is a practical checklist to help you avoid common LOI mistakes:

• Clearly label the LOI as "Non-Binding" or "Binding" as appropriate, and specify which sections are binding.
• Include all key commercial terms and conditions to closing.
• Set an expiration date or clear termination process.
• Identify the governing state law and check for any special rules in that jurisdiction.
• Do not start performing the deal until a final agreement is signed, unless you are comfortable with the risk.
• Have a licensed attorney review the LOI before you sign or send it, especially for high-stakes deals.

Questions to Ask Before Sending or Signing a Letter of Intent

Before you send or sign a letter of intent, ask yourself and the other party these important questions:

• What is the purpose of this LOI? Is it just to outline the deal in principle, or do you want certain terms to be binding?
• Which terms are binding and which are not? Are confidentiality, exclusivity, or non-solicitation clauses intended to be enforceable?
• Are all the key commercial terms included? Is anything missing that could cause confusion later?
• What are the conditions to closing? Are there any approvals, financing, or regulatory steps required?
• What is the timeline? Does the LOI set clear deadlines for due diligence, signing a final agreement, or expiry?
• What state law will apply? Have you checked if that state treats LOIs as binding or non-binding?
• Do you need legal review? For high-value, complex, or cross-border deals, attorney review is strongly recommended.

It is also wise to:

• Ask for a draft of the LOI before agreeing to sign, so you can review the language and suggest changes.
• Consider whether the LOI needs to be approved by your board, investors, or other stakeholders before signing.
• Understand any industry-specific regulations that may affect the deal or the LOI (for example, in healthcare, finance, or government contracts).

For founders and operators, it is common to feel pressure to sign quickly to keep the deal moving. However, taking the time to ask these questions and review the LOI can save you from costly mistakes or disputes later.

Here is a sample scenario: A SaaS company in Florida is approached by a larger competitor interested in acquiring its business. The competitor sends a standard LOI template. The founder reviews the LOI and notices that the exclusivity clause is open-ended and that the governing law is set to Delaware, not Florida. The founder asks for clarification, negotiates a 60-day exclusivity period, and requests the governing law be changed to Florida. By asking these questions and negotiating the terms, the founder avoids being locked into an unfavorable situation.

When to Get Attorney Review of a Letter of Intent

While some simple LOIs can be handled without legal help, there are situations where attorney review is highly recommended. These include:

• The deal is high-value (such as the sale of a business, major investment, or large commercial contract).
• The LOI includes complex terms (such as earn-outs, equity, intellectual property, or regulatory issues).
• There is uncertainty about which terms are binding or non-binding, or about the effect of state law.
• The parties are in different states or countries, raising cross-jurisdictional issues.
• There are industry-specific rules or government approvals involved (such as healthcare, finance, or defense).
• You are using a template that may not fit your specific deal, state law, or industry requirements.

An attorney can help you:

• Draft or review the LOI to ensure clarity and alignment with your goals.
• Identify hidden risks or missing terms.
• Negotiate changes to protect your interests.
• Advise on enforceability and state law differences.
• Coordinate with other advisors, such as accountants or tax professionals, to address tax or financial implications.

For example, if you are selling a business and the buyer wants an exclusivity clause, an attorney can help you understand how long it should last, what exceptions to include, and what happens if the deal falls through. Or, if you are entering a joint venture with a company in another state, legal review can help ensure the LOI is enforceable and does not create unwanted obligations.

Attorney review is especially important if the other party is represented by counsel, or if you are dealing with a large or sophisticated counterparty. Even if you are using a template, a licensed attorney can help you adapt it to your specific deal and state law.

Remember, a letter of intent is often the first step in a larger negotiation. Getting it right can set the tone for the rest of the deal and help avoid disputes or delays.

Here is a checklist for when to get legal review:

• Is the deal value significant to your business?
• Are there complex or unusual terms?
• Is there any uncertainty about enforceability or state law?
• Are you dealing with a counterparty in another state or country?
• Is the other party represented by counsel?
• Do you need to protect confidential information or intellectual property?

If you answer yes to any of these, legal review is a smart investment.

FAQs

Is a letter of intent legally binding in the US?

It depends on the wording of the LOI and the applicable state law. Most LOIs are intended to be non-binding except for certain clauses (like confidentiality or exclusivity). However, if the LOI is unclear or the parties act as if a deal exists, a court may find it binding. Always specify which terms are binding and check state law.

What is the difference between a letter of intent and a memorandum of understanding?

Both documents outline the main terms of a proposed deal, but a letter of intent is more common in business sales and investments, while a memorandum of understanding (MOU) is often used for collaborations or partnerships. The main difference is in formality and context, not legal effect. Both can be binding or non-binding depending on the language used.

Can I use a template for a letter of intent?

Templates can be a good starting point, but they often need to be customized for your specific deal, state law, and industry. Do not rely on a generic template for high-value or complex deals without legal review.

What happens if the parties do not sign a final agreement after an LOI?

If the LOI is non-binding, either party can walk away without penalty (except for any binding clauses, like confidentiality). If some or all of the LOI is binding, you may have legal obligations even if no final contract is signed. Always clarify the status of the LOI and any consequences for not proceeding.

Does the state where the LOI is signed project?

Yes, the state law governing the LOI can affect whether it is enforceable, how it is interpreted, and what remedies are available. Always specify the governing law in your LOI and consult a licensed attorney if you are unsure about state-specific rules.

Key Takeaways

• A clear format for a letter of intent helps avoid misunderstandings and legal risk.
• Always specify which terms are binding and which are not, and check relevant state law.
• Include key commercial terms, conditions to closing, confidentiality, exclusivity, and expiry or termination clauses.
• Review the LOI carefully before signing, and ask questions if anything is unclear or missing.
• Attorney review is recommended for high-value, complex, or cross-border deals, or if you are unsure about enforceability.

For help drafting or reviewing a letter of intent, or to discuss your specific business deal, contact our team at (888) 449-8437 or team@sprintlaw.com. Where legal services are required, they are delivered by licensed lawyers at trusted US law firms through the Sprintlaw platform.