How to write a memorandum of understanding?
Are you a company owner or entrepreneur who wants to establish any type of commercial arrangement for your business operations?
Then, it is vital that you clearly state the key terms and conditions in a written document.
This helps reduce the risk of confusion and misunderstandings between two or more business parties.
In most cases, when business entities are working towards a formal legal contract they have several meetings and discussions.
They may need to reach a mutually agreeable arrangement.
So, say, it’s too early to draft a formal contract at that point, you as a business owner or professional can still keep a record.
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You could note down the agreed-upon terms and conditions in an informal type of document.
These are cases, where a memorandum of understanding or MOU comes in handy.
A memorandum of understanding is an informal yet legal document.
It chalks out your mutually shared goals, expectations, and outcomes of a commercially motivated partnership.
When any two or more parties formally pen down their binding agreement as a legal contract, the MOU acts as a starting point of this arrangement.
Explanation of Memorandum of Understanding
An MOU is the written formal agreement between two or more parties that is an expression of their associated will to align goals and objectives.
It is a descriptive document that encompasses the mutual intent of the parties’ common lines of action.
A MOU between two parties is called a bilateral MOU, while more than two parties is called a multilateral MOU.
Treaties involving three or more nations are known as multilateral treaties. Treaties between two countries are known as bilateral treaties.
In simple words, it is an informal understanding between two or more entities to express their agreement on proceeding with their mutual goals.
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Why are MOUs Useful for Businesses?
A MOU is mostly executed between government bodies and organizations. But they are equally useful for business-oriented companies.
It is an agreement to agree. The MOU is more flexible than a contract, and can be changed as per the mutual consent of the two parties.
The MOU is an indication that the concerned parties have reached a point of understanding. And are now all set to go ahead with their common plans.
It should be kept in mind that the MOU has no legal binding effect on any party. It only serves as a ceremonial assertion.
It highlights the imminence of a future lawfully binding contract between the same concerned parties.
If we analyze the MOU in terms of the level of formality, it is less formal than a contract but more formal than a verbal agreement.
Difference between MOU and Business Contract
Some people often confuse a MOU with a contract, but they are considerably different.
A contract is a privately written treaty and is legally enforceable by law. On the other hand, a MOU has no legal binding or lawful enforcement.
MOUs are common for international agreements between countries and large corporations.
It is a widely used tool for negotiating business arrangements between different stakeholders.
Such as for accepting investments or in the preliminary stages of M&A transactions.
Other Names of MOUs
Although widely used in many companies and business sectors, MOUs can be referred to differently in different circumstances.
Some of the most commonly used synonyms of MOU in a business setup include:
- MOU Agreement
- Memorandum of Understanding Form
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Steps to Writing a Memorandum of Understanding
Although there are no strict rules to drafting a MOU, some basic guidelines are as follows.
Step 1: Title and Topic of MOU
This is the very first step of your MOU drafting process. Select a relevant title for the document.
This name should be reflective of the type of MOU you are developing or the basic reason for its creation.
Some common types of title will include descriptions as asset purchase MOU, venture agreement MOU, or service agreement MOU.
Step 2: List Down the Concerned Entities
The next step is to specify the number and names of the parties involved in the MOU.
This portion should include the basic information and details about the concerned parties including locations, addresses, and company specifications.
Step 3: Initiation and Termination Information
Every MOU should clearly specify a date of execution or activation. This is the time when the mutually discussed project or work will start.
The MOU should also enlist the details of the termination policy. This will include basic terms upon which the parties can terminate the agreement.
If the MOU is specific to a one-time project or job, it should give the details of the start date and completion date of the entire project.
Step 4: Outline Goals and Objectives
This is a key portion of the MOU. It contains the description of the outcomes you expect to achieve from the MOU and its execution between the given parties.
It enlists the goals and objectives in terms of numbers or subjective results that you and the other party are looking for.
Step 5: Project Details and Assignment of Responsibilities
Once the goals and objectives of an MOU are finalized, the next step is to chalk out a strategy or plan of action to achieve them.
This is where you give the details of the projects that you plan to start with the MOU.
There will also be a thorough description of the responsibilities of the two parties and the designation of specific duties.
You’ll also include the milestones that will need to be achieved as well as all the deadlines of achieving them.
Step 6: Scope and Limitations of the MOU
Like any other business agreement, the MOU should clearly explain its scope and limitations.
It should specify how the partnerships that will be created between the given parties.
And, how it will enable them to achieve the specific goals and objectives that they are targeting.
If there are any challenges, complications, or limitations of this mutually consented arrangement, they should be highlighted explicitly.
Step 7: Specify a Timeline
Like any other project plan, the MOU cannot be complete without projected timelines.
List down the important dates, deadlines, and time brackets of the milestones that need to be achieved in the action plan.
These timelines should be linked with the outcomes and deliverables.
Step 8: Designated Signatory
Being a contractual written document between two or more parties, the MOU must be signed by designated parties.
There should be a separate signing space for each legal signatory.
Once signed it will reflect their mutual agreement to the information and details specified in the MOU.
There should also be a specified place for the date of signing or MOU execution.
Types of Memorandum of Understanding for Business
MOUs are commonly used in different business arrangements. They are accepted for both local as well as international agreements.
Some MOUs are generalized and concise while others may be lengthy and extremely detailed with lots of information.
Based on the purpose of creating an MOU, the document can be classified into various types.
The most commonly employed form of MOUs in business operations include the following.
Joint Venture MOU
This MOU is crafted in the initial period of a joint venture negotiation between two or more parties. It can also be termed as a co-venture agreement.
The Joint Venture MOU is a stepping stone for helping parties to move towards the achievement of a common goal.
It is created for a short temporary period of time.
The joint venture MOU can further be classified as generalized or contractual.
Service Agreement MOU
The MOU which moves two or more parties towards the development of a formal service contract is called a service agreement MOU.
It helps in reaching a mutual consensus to start a project or provide lawful help in a given service sector.
The MOU should enlist all the specific services that will be provided to the concerned party but not in a legally binding way.
Like all other MOUs, the service agreement MOU is also signed at the very beginning of the service contract negotiations.
A memorandum of understanding that helps entities develop and execute an outsourcing legal contract is called an outsourcing MOU.
It is generally created between a company and its clients.
The service provider will promise to deliver specific services to one or more parties involved in the MOU.
Asset Purchase MOU
A MOU that is drafted and signed to initiate a business contract for buying an asset is called an asset purchase MOU.
It is usually an agreement between the proposed seller and the buyer of the asset.
The MOU should describe details of the price and other relevant terms and conditions of the purchase agreement.
It should also highlight the type, make, and specification of assets involved in the purchase process.
Business Relation MOU
As the name suggests this MOU outlines the understanding or agreement between two or more business entities for mutual gains.
It may be drafted for a future business prospect like a merger, acquisition, or creating a partnership.
The key is that it should be able to lead both parties to a lawful business arrangement.
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The MOU: A Must Do “Advantageous Pre-Agreement”
Although an MOU is not enforceable by law, it functions as an effective “Pre-Agreement Document”.
It is a great way to outline the two or more parties’ consensus on certain elements, terms of trade and responsibilities assigned.
Ideal for negotiations, every entrepreneur should incorporate this format of business consensus in their corporate dealings and operations with various stakeholders.
The main three advantages that make a Memorandum of Understanding a “Must Addition” for developing mutually beneficial company relations and pursuing effective negotiation processes are as follows.
Basis for Negotiation
Business and trade negotiations are often not a single day affair. They require recurring discussions and meetings between stakeholders.
After every meeting, the parties reach a consensus on some terms while keeping other clauses for further negotiations.
In such a scenario, the MOU acts as a basis for progress and chalks out the intention for returning back for talks later.
It makes it simpler and easier to draft the formal legal document in the future.
And reduces the need for creating amendments and addendums later on.
Easy to Exit
Many business owners consider this non-legal binding condition of the MOU a negative characteristic.
However, if you think like a seasoned businessman, it can provide you with a big advantage as well.
If you or any other participating party, at any point of the discussion, reach a point where there is a disagreement of elements, there is room to withdraw from the MOU.
Unlike other business contracts, the MOU does not restrict your ability to vary from the pre-agreement arrangement. Or, cause you any legal or monetary fines.
The MOU is a tool that provides a paper trail to your business negotiations and discussions.
Because it is written on paper, you have a clear guideline of the history of terms and conditions that have been discussed and those that have been agreed upon.
A memorandum of understanding may not be a legally binding document for business entities.
But it offers a starting point for several different ventures, collaborations, and profitable partnerships.
An MOU reduces the uncertainty of business arrangements.
That’s because it records all the prior verbal agreements between entities to avoid ambiguities and confusion.
With an MOU you can specify and follow an effective framework for your future business dealings with the concerned parties.
While drafting a MOU, the creator should be vigilant about the details of the intention and purpose of the concerned parties.
The selection of the language, words, titles and basic clauses of the MOU should be done with great care and precaution.
Weak drafting or choice of the wrong language can prove to be disadvantageous to the concerned parties rather than benefit them.
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This article is for informational purpose only. You should consult your lawyer for proper legal guidance.