Letter of Intent When Buying a Business in Ontario: What Binds You

You and the seller have agreed on the broad shape of a deal: a price, roughly what you are buying and a target closing date. Someone now suggests putting it in a letter of intent, often called an LOI. It looks short and friendly, and it is tempting to sign it quickly so the deal keeps moving.

That speed can cost you. An LOI sets the frame for everything that follows, and a few of its clauses can bind you even when the rest says it is only a proposal. This article explains how LOIs generally work in an Ontario business purchase, which terms are worth writing down and where to get advice.

What a letter of intent does

An LOI records the main terms the buyer and seller expect to include in a later purchase agreement. It is usually signed before the buyer spends serious money on due diligence, which is the review of the business's finances, contracts, staff and legal position. Its job is to show that both sides are serious and to keep everyone working from the same outline.

An LOI is normally not the final contract. The detailed promises, such as statements about the state of the business and what happens if something goes wrong, are generally set out in the purchase agreement. The LOI is the roadmap, not the destination.

Which parts are usually binding

Whether a clause binds you depends on how it is written and what the parties intended. Many LOIs say the price and structure are subject to a definitive agreement, yet make a few other clauses binding. The table shows how these terms are commonly treated. It is a general guide, not a rule, so read the actual wording.

If you want the whole letter to be non-binding apart from named clauses, say so clearly and list those clauses. If the wording is vague, a court may have to decide what you meant, which is an expensive way to find out.

What to include in the LOI

A good LOI is short but specific. Gaps in the LOI tend to become arguments later, so aim to settle the big points now.

• Who the buyer and seller are, including the legal names of any corporations.
• Whether you are buying assets or shares, and which assets, contracts and staff are included.
• The price, how it is paid, and any part that is deferred, financed by the seller or tied to future results.
• A target closing date and the steps that must happen first.
• Conditions that must be met before you must close, such as satisfactory due diligence, financing and landlord consent.
• The length of the exclusivity period and what access you get to records and staff.
• What the seller will do after closing, such as a transition period or an employment role.
• Which clauses are binding and which are not.

Ontario rules that can shape the terms

Some legal and tax rules are easier to deal with if the LOI anticipates them. A few examples follow. Each deal turns on its own facts, so use these as prompts for questions to your lawyer and accountant.

• GST/HST election. The section 167 election lets the buyer and seller jointly elect to have no GST/HST payable on the sale of a business or part of one, and it is made on Form GST44. The buyer must acquire all or substantially all (at least 90%) of the property needed to carry on the business, not just individual assets. It cannot be used if the seller is a GST/HST registrant and the buyer is not. Deciding what you are buying in the LOI can therefore affect this election.
• Non-compete. Under the Employment Standards Act, 2000, employers are prohibited from entering into employment contracts or other agreements that contain a non-compete. There is a sale-of-business exception where a business or part of one is sold or leased, the seller becomes the buyer's employee and a non-compete is agreed as part of the sale. If you want the seller to stay out of your market, raise it in the LOI and confirm the details with a lawyer.
• WSIB. The WSIB issues purchase certificates to verify that a company selling or transferring all or part of a business has WSIB coverage, and a buyer who does not obtain a valid one may be held liable for all amounts the vendor owes up to the sale date. Making delivery of the certificate a closing condition in the LOI is a practical protection.
• Liens. Ontario's Access Now service lets a buyer search the Personal Property Security Registration system for liens against a seller's assets. A condition that the assets be free of undisclosed liens is a common ask.
• Price allocation. For capital cost allowance, CRA says to use the individual asset prices in the sale agreement if they are set out and reasonable. Agreeing the approach early avoids a late disagreement.

Competition law is rarely a concern for small purchases. The 2026 pre-merger notification thresholds are a $93 million transaction-size threshold and a $400 million party-size threshold, and most small-business purchases fall well below these.

What to do next

Treat the LOI as the first draft of your deal, not a formality. Before signing, take these steps.

• Read every clause and mark which ones you believe are binding.
• Ask your lawyer to review the draft, particularly exclusivity, costs and the wording that says the rest is subject to a final agreement.
• Talk to your accountant about the asset or share structure, the GST/HST election and how the price will be allocated.
• Add closing conditions for due diligence, financing, the WSIB certificate and a lien search.
• Keep your own record of what the seller has told you, since statements made before signing may later need to be backed up in the purchase agreement.
• Do not pay deposits or commit to costs on the strength of a handshake or an unsigned letter.

Frequently asked questions