- An LOI sets out the parties' shared understanding of a proposed deal — price, structure, key conditions, and a rough timeline — so both sides can decide whether it's worth investing time and money in due diligence and formal drafting.
- The definitive agreement is where the real risk allocation happens — who bears the cost if something turns out to be wrong with the business after closing, what happens if a condition isn't met, and how disputes get resolved.
An Ontario business purchase typically moves through two very different documents before closing: a letter of intent (LOI), then a definitive purchase agreement — a Share Purchase Agreement (SPA) or Asset Purchase Agreement (APA). It's tempting to treat the LOI as "basically a deal," especially once both sides have signed something with a price attached. That assumption is exactly where buyers and sellers get burned.
The two documents serve different purposes and create very different legal protections. Knowing what you actually have — and don't have — at each stage keeps you from over- or under-committing to a letter of intent vs. purchase agreement decision that isn't finished yet.
What an LOI Is Meant to Do
An LOI sets out the parties' shared understanding of a proposed deal — price, structure, key conditions, and a rough timeline — so both sides can decide whether it's worth investing time and money in due diligence and formal drafting. Most of an LOI's substantive terms, including price and structure, are deliberately non-binding, meaning either side can still walk away or renegotiate before signing a definitive agreement.
What's often binding, even inside a non-binding LOI, is a narrower set of provisions: confidentiality, exclusivity (or "no-shop"), and how costs are allocated if the deal falls through. These are usually drafted specifically to survive regardless of whether the rest of the deal proceeds.
What a Definitive Agreement Adds
| LOI | Definitive Agreement (SPA/APA) | |
|---|---|---|
| Binding on price? | Generally no | Yes |
| Binding on deal structure? | Generally no | Yes |
| Representations & warranties | Not included | Central feature — allocates risk between buyer and seller |
| Indemnities | Not included | Sets out how post-closing claims are handled |
| Closing conditions | Described at a high level | Precisely defined, with consequences if unmet |
| Disclosure schedule | Not included | Qualifies the seller's representations item by item |
| Purchase price adjustment mechanics | Not included | Typically set out, for example a working-capital adjustment |
| Enforceable if a party walks away? | Generally only for the clauses it makes binding (confidentiality, exclusivity, cost allocation). An LOI that shows an intention to be bound can be enforced in full. | Yes, subject to its own terms |
The definitive agreement is where the real risk allocation happens — who bears the cost if something turns out to be wrong with the business after closing, what happens if a condition isn't met, and how disputes get resolved.
What Can Still Change Between LOI and Closing
Because most of the LOI is non-binding, due diligence findings between the LOI and the definitive agreement can lead to real changes:
- Price adjustments if due diligence reveals issues not known when the LOI was signed.
- Structure changes — for example, moving from a proposed share sale to an asset sale, or a hybrid, once liabilities or tax considerations become clearer.
- New or revised conditions — financing, third-party consents such as a landlord's consent to assign a lease, or regulatory approvals that weren't fully scoped at the LOI stage.
- Walking away entirely. Either side can generally still exit, though doing so may trigger the LOI's binding provisions, for example a cost-reimbursement obligation if exclusivity is breached.
Assuming Protection You Don't Have Yet
A common and costly mistake is treating the LOI stage as though it carries the same protection as a signed definitive agreement:
- A buyer who tells employees, landlords, or lenders the deal is "done" after an LOI is getting ahead of the actual legal position.
- A seller who stops engaging with other potential buyers based only on informal goodwill — rather than a properly drafted exclusivity clause — has no enforceable protection if the buyer walks.
- Either side assuming representations and warranties exist before the definitive agreement is signed is simply wrong; there's nothing yet to enforce.
Frequently asked questions
If we've signed an LOI, are we legally committed to the deal?
Generally not on price or structure — most LOIs are deliberately drafted to leave those open until a definitive agreement is signed. Specific clauses like confidentiality and exclusivity are the exception; check what your LOI actually makes binding.
Why not just skip the LOI and go straight to a definitive agreement?
An LOI lets both sides align on the big picture, and secure some protection like exclusivity, before spending significant money on the due diligence and drafting a definitive agreement requires. Skipping it can mean investing heavily in a deal that was never actually aligned on the basics.
Can a definitive agreement differ significantly from the LOI?
Yes, and it often does, once due diligence surfaces information that wasn't available when the LOI was signed. The LOI is a starting point for negotiation, not a locked template.
What happens if we never get to a definitive agreement after signing an LOI?
Generally, the deal simply doesn't close, and each side goes their separate way, except for whatever binding provisions the LOI itself included — confidentiality, exclusivity, cost allocation — which can still apply.
Official resources
Government and regulator sources for this topic. Rules change — confirm the current position before you rely on it.
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