The Letter of Intent When Buying or Selling a Business in Ontario

Before a formal purchase agreement is signed, most Ontario business deals start with a letter of intent — commonly called an LOI (or, less formally, a term sheet or heads of agreement). The LOI is supposed to be the easy document: a quick summary of what both sides have agreed in principle before the lawyers get involved. In practice, a poorly drafted LOI causes costly disputes, wasted due diligence, and failed deals. This article explains what belongs in an LOI, what should stay binding versus non-binding, and how to approach this early stage of a business sale strategically.

What Is a Letter of Intent?

A letter of intent is a short document — often two to five pages — that captures the key commercial terms of a proposed business transaction. It is signed by both the buyer and seller after initial negotiations but before either side has done serious legal or financial due diligence.

The LOI serves several purposes:

• It tests whether the parties are genuinely aligned before anyone spends money on accountants and lawyers.
• It creates a framework for the purchase agreement that follows.
• It can impose certain binding obligations — like exclusivity — even when the rest of the deal is still conditional.

Binding vs Non-Binding: The Critical Distinction

This is the most misunderstood aspect of the LOI. Most LOIs are non-binding on the core commercial terms — meaning neither party is legally required to complete the deal on those terms. The price, structure, and other business terms are stated as "subject to" due diligence, financing, and a definitive agreement.

However, LOIs almost always contain some binding clauses, including:

• Exclusivity (or "no-shop"): The seller agrees not to negotiate with other buyers for a fixed period — typically 30 to 90 days — while the buyer does their due diligence. This is almost always binding.
• Confidentiality: The parties agree not to disclose the existence or terms of the deal. This is binding.
• Costs: Each side pays their own legal and professional fees regardless of whether the deal closes. Usually binding.
• Governing law: The LOI is governed by Ontario law. Binding.

Everything else — price, structure, conditions, representations — is typically non-binding until the purchase agreement is signed.

Why this matters

If your LOI is ambiguous about which parts are binding, you may end up in a dispute about whether a "deal" was actually made. Courts have found binding contracts in documents labelled "non-binding" when the language was loose. Get your LOI reviewed by a lawyer before you sign.

Key Commercial Terms an LOI Should Capture

1. Purchase price and payment structure

State the total consideration and how it will be paid — cash at closing, a vendor-take-back loan, an earn-out tied to future performance, or some combination. If there is a holdback or price adjustment mechanism (for example, adjusted to reflect working capital at closing), flag it here even if the formula comes later.

2. Asset purchase vs share purchase

Which structure are the parties proposing? This affects everything from tax to due diligence scope. Even a non-binding indication of structure sets expectations.

3. Conditions

What must happen before the deal closes? Common conditions include:

• Satisfactory due diligence
• Buyer securing financing
• Landlord consent to assignment of the lease
• Regulatory approvals (if applicable)
• Key employee retention agreements

4. Exclusivity period

How long does the buyer have exclusive access to the seller's books and information? What happens if the buyer walks without good reason — is there a break fee? Most sellers don't demand break fees at the LOI stage, but it is worth discussing.

5. Proposed timeline

Target date for completing due diligence, signing the purchase agreement, and closing. Timelines slip, but a rough schedule keeps everyone accountable.

6. Deposit

Is the buyer putting up a deposit when the LOI is signed or when the purchase agreement is signed? What are the conditions for the deposit to be refundable?

7. Employee and management intentions

If the seller's management team is staying post-close, or if the owner is subject to a transition period, it helps to flag this early. Silence on employees can lead to awkward surprises.

Common Mistakes in Ontario Business LOIs

Negotiating price too precisely without due diligence. A firm price agreed before any due diligence leads to either a blown-up deal or a buyer who closes their eyes and hopes for the best. Most sophisticated buyers agree on a price formula or a range, not a fixed number, until the books are reviewed.

Forgetting binding exclusivity terms. Sellers sometimes sign an LOI thinking nothing is locked in, then are surprised to find they cannot talk to other interested parties for 60 days. Read the LOI carefully.

No governing law clause. If the LOI ever needs to be enforced, you want it clear that Ontario law applies.

No expiry date on the LOI. An open-ended LOI creates ambiguity. Include a date after which either party can walk without consequence if a purchase agreement has not been signed.

Frequently asked questions