Is a Letter of Intent Binding When Buying a Business in Alberta?

A letter of intent, often called an LOI, is usually the first written document in a business sale. It sets out the main terms before the lawyers draft the full purchase agreement.

Many people assume it is just a friendly outline. That is not always safe. This article explains how to read an LOI, which clauses deserve extra attention, and when to get advice. How a particular letter is treated depends on its wording and the facts.

This article covers the law of Alberta.

What a letter of intent usually contains

An LOI normally covers the proposed price, what is being bought, how the price will be paid, a target closing date, conditions such as financing and due diligence, and sometimes exclusivity and confidentiality. It is meant to show both sides are serious and to avoid wasting time on a deal that cannot work.

There is no single standard form. Some letters say clearly which sections bind the parties and which do not. Others say nothing, and that is where disagreements tend to start.

Which clauses to look at most closely

Whether any clause can be enforced depends on its wording, how clearly it is expressed and what the parties did. A lawyer can tell you how Alberta law would likely treat your document. In the meantime, these are the clauses to read slowly.

• Exclusivity: does it stop the seller from talking to other buyers, and for how long?
• Confidentiality: what must you keep private, and for how long? Does it overlap with an existing non-disclosure agreement?
• Deposit: who holds the money, what is it for, and under what conditions is it returned?
• Price and conditions: are they described as final, or as subject to due diligence, financing and a signed agreement?
• Costs: who pays for legal, accounting and search costs if the deal does not close?
• Closing date: is it a target or a deadline?

Look for a sentence that states which parts bind and which do not. If there is none, ask for one.

Why the structure terms matter

Even a letter that mostly outlines the deal can lock in choices with real consequences. Take asset versus share structure. The Canada Small Business Financing Program does not finance share purchases or assets acquired by a holding company. If your lender plans to use that program, an LOI that commits you to a share purchase could create a problem later.

Tax is another example. Without an election, each property and service in a business sale is a separate supply and GST (5% in Alberta) can apply to the taxable parts. If a joint election under section 167 of the Excise Tax Act is valid, no tax is payable on the supplies under the agreement, but the election is not available where the seller is a registrant and the buyer is not. Even with a valid election, tax is still payable on a taxable service the supplier will render, on a taxable lease, licence or similar supply of property, and, where the buyer is not a registrant, on a taxable sale of real property. If the letter says nothing about the election, the later agreement may be the first place it comes up. Consider asking for a line that the parties will cooperate on any available election, which is filed on CRA form GST44.

Financing amounts are also worth checking against the letter. Under that program, financing for an existing business is capped at the lower of the purchase price or the appraised value of the eligible assets.

Protecting yourself as buyer or seller

Buyers usually want time to do their checks without competition, and a clear way out if something turns up. Sellers usually want confidence the buyer is serious and protection for sensitive information. Both can be reflected in the letter if you raise them before signing.

Due diligence can help a buyer test what the seller says. Corporate Registry searches through a registry agent can show registration dates, owners, directors and legal addresses. Personal Property Registry searches in Alberta can be requested by individual debtor name, business debtor name, serial number or registration number, on a Search Request form submitted at any registry agent office. A search returns an exact match, an inexact match, no match, or both exact and inexact matches. A letter that makes the deal conditional on satisfactory searches and records keeps your options open.

What to do next

• Do not sign under time pressure; ask for a few days to review.
• Mark every clause that sets a deadline, a payment or a restriction on you.
• Ask whether each section is intended to bind or is only an outline, and get the answer in writing.
• Check the structure and tax terms with your accountant.
• Confirm financing terms with your lender.
• Have a lawyer review the letter before you sign or return it.

Frequently asked questions