Letter of intent vs purchase agreement

These are the two documents almost every buyer and seller sign in sequence, and the gap between them is where a deal either holds together or starts to unravel. One is a snapshot of terms agreed before real verification has happened; the other is the enforceable result of that verification.

What the letter of intent does

The letter of intent converts a conversation into a written framework, giving the buyer enough certainty to spend real money on lawyers and accountants and giving the seller enough comfort to open the business up to scrutiny. It grants the buyer exclusivity for a defined period in exchange for that access, and it is deliberately light on detail in places, because neither side has yet confirmed everything a full purchase agreement needs to say.

What the purchase agreement does

The purchase agreement is the document that actually closes the deal: representations and warranties, indemnities, closing conditions, the purchase price mechanism and what happens after closing all get written into enforceable language, drafted once due diligence has given both sides a real picture of the business rather than the impression they started with. It commonly runs to dozens of pages with attached schedules, against a letter of intent that might run to a handful.

Where the real difference sits

• The letter of intent is negotiated before real verification of the business; the purchase agreement is negotiated with the benefit of completed diligence
• Terms in the letter of intent are largely revisable by mutual consent without breaching anything; terms in the purchase agreement are enforceable as written once signed
• Exclusivity in the letter of intent is what buys the time to get from one document to the other — without it, a seller could sign a purchase agreement with someone else mid-diligence
• The purchase agreement, not the letter of intent, is the document a court looks to if a dispute arises after closing

Why buyer and seller pull in different directions

A buyer often wants the letter of intent worded loosely on price and adjustment mechanisms, so that findings during diligence can justify renegotiating downward without technically breaching anything already agreed. A seller wants the opposite: as much precision as possible on price and major terms at the letter-of-intent stage, specifically to prevent that later renegotiation once exclusivity has already taken the business off the market. How much detail goes into the letter of intent is, in effect, a real negotiation of its own.

What commonly goes wrong

Two mirror-image failures show up repeatedly. A letter of intent left vague on the working capital target, the scope of a non-compete, or how employees are treated can send the purchase agreement negotiation back to fights both sides thought were settled, burning time and goodwill weeks into the process. The opposite failure is a seller granting a long exclusivity period under a thin letter of intent and then facing a materially lower final offer once the buyer cites diligence “findings” that were foreseeable all along — leverage the seller had already given away by the time it surfaces.

How to decide

The practical question is not whether to use both documents — most real deals do — but how much to settle at the letter-of-intent stage. Leaving every mechanism to be worked out later maximizes flexibility but invites reopening; settling too much before diligence risks negotiating against numbers no one has verified yet. Naming the major mechanisms in the letter of intent, even without final figures, and having a lawyer review the exclusivity and cost provisions before signing, tends to leave both sides in a stronger position once the purchase agreement is actually drafted.