In franchising, a letter of intent (LOI) is a non-binding document that outlines the preliminary terms of a potential franchise deal before the formal Franchise Agreement is signed. It signals good faith and clarifies expectations. A letter of intent helps both franchisor and franchisee align early in the process.
A letter of intent (LOI) in franchising is a roadmap document used to guide early negotiations between a franchisor and a prospective franchisee. It typically outlines key details such as proposed territory, initial fees, development timelines, and confidentiality provisions. Although most LOIs are not legally binding, they may include specific binding clauses—such as confidentiality or temporary exclusivity—to protect sensitive information and reserve rights. The LOI does not replace the Franchise Disclosure Document (FDD) or Franchise Agreement but helps both parties clarify terms and expectations before significant time or money is invested. By using a letter of intent, franchisors confirm a candidate’s seriousness, while franchisees gain a clearer understanding of what lies ahead.
Additional Definition: A written statement of intention to perform an act. In franchising, the franchisor sometimes provides to the prospective franchisee a letter of intent stating the company’s intention to offer a franchise agreement. In commercial banking practices, a letter of intent, or commitment agreement, may state the bank’s intention to make a loan to the prospective franchisee. Letters of intent are usually not binding legal commitments.
The letter of intent has long been used in business transactions, from real estate to corporate mergers, and franchising adopted it as the industry expanded in the mid-20th century. Early franchisors used LOIs to secure commitments from candidates while preparing agreements and disclosures. Over time, LOIs became more sophisticated, incorporating territory protections, exclusivity periods, and confidentiality safeguards. In today’s digital franchising environment, LOIs remain a common step to organize negotiations, protect information, and ensure both parties understand the framework of their potential relationship.
'The franchise candidate signed a letter of intent reserving exclusive rights to the Chicago territory.'
'The franchisor required a letter of intent before releasing confidential financial information and the FDD.'
'Both parties used the letter of intent to outline the initial fee structure before drafting the Franchise Agreement.'
A letter of intent in franchising is a preliminary, mostly non-binding agreement that sets expectations and provides structure before a formal Franchise Agreement is signed. While it cannot guarantee approval, it helps guide negotiations, protect sensitive information, and demonstrate commitment. A letter of intent is an effective tool for bringing clarity and alignment to the franchise relationship.
