Letters of Intent and Purchase Agreements
A letter of intent records the main terms two parties have reached in principle before a purchase agreement is written, and the purchase agreement is the detailed contract that carries the deal through closing. Within the agreement, representations, warranties and indemnities allocate risk between buyer and seller, and a key skill is telling which terms bind the parties and which do not.
The purpose of a letter of intent. A letter of intent (LOI) sits between early talks and the full contract. It sets out the headline terms the buyer and seller have reached in principle, such as the general price approach, the structure of the deal and the broad timetable. Writing these down early confirms that both sides understand the deal in the same way before either spends heavily on due diligence and legal drafting. It also gives the later documents a reference point. Because it is short, it is much cheaper to negotiate than a full agreement, and a disagreement surfaces sooner rather than after weeks of work.
Representations and warranties in a purchase agreement. The purchase agreement is the detailed contract for the sale. Two of its main clauses are representations and warranties. A representation is a statement of fact that one party makes about something, for example about the target's finances, ownership of its assets or legal standing. A warranty is a promise that such facts are true. In practice the two are usually written together, and the seller gives most of them. They matter because the buyer relies on them when setting the price. The facts the buyer checked in due diligence are typically written into the agreement as statements the seller stands behind. If a statement turns out to be untrue, the buyer has a contractual basis for a claim.
Indemnities and who bears the loss. An indemnity is a promise by one party to compensate the other for specified losses. In a purchase agreement it usually states what happens when a representation or warranty proves false, or when a named risk materializes after closing. It works as a risk-allocation tool: the parties decide in advance who pays for particular problems instead of arguing about it later. The details, including what is covered and how a claim is made, are negotiated clause by clause, so the wording is what you read closely.
Binding and non-binding terms. A letter of intent usually mixes two kinds of terms. Commercial terms such as price and structure are commonly expressed as non-binding, because they are subject to due diligence and to the final agreement. Other terms, often confidentiality or a period during which the seller negotiates only with this buyer, are commonly drafted to bind the parties even though the rest does not. Which terms bind depends on the actual wording and on the law where the deal is governed, so the document itself, and legal advice, decide the question, not the label "letter of intent". Look for language that says a provision is or is not intended to create legal obligations.
