What does a letter of intent do when buying or selling a business in Ontario?
A letter of intent (LOI) is a preliminary document that outlines the key terms of a proposed business transaction before the parties negotiate and sign a full purchase agreement. In Ontario business deals, an LOI typically covers the purchase price, whether it is a share or asset deal, key conditions (financing, due diligence), exclusivity, and a target closing timeline.
Most LOIs are intended to be non-binding — they signal serious intent without locking either party into final terms. However, certain provisions within an LOI are usually intended to be binding: confidentiality obligations, exclusivity periods (preventing the seller from shopping the deal to other buyers during negotiations), and sometimes break-up fees.
Courts look at the actual language to determine which provisions are binding. A poorly worded LOI that blurs the binding/non-binding distinction can create unexpected obligations. Sellers sometimes face claims that a binding deal was formed at the LOI stage.
An LOI is a relatively brief document, but getting it right matters. The structure you agree to in the LOI shapes the negotiation of the full agreement, and fixing problems is harder once both sides have invested significant time and money in due diligence.
Key takeaways
- An LOI outlines key deal terms before the full purchase agreement is negotiated.
- Most LOI provisions are non-binding, but confidentiality and exclusivity clauses usually are.
- Poor drafting can blur the binding/non-binding line — courts look at the actual language.
- The LOI structure shapes all subsequent negotiations, so it pays to get it right.