- In Ontario business-sale practice, "term sheet" and "letter of intent" are generally treated as different names for the same kind of document — a preliminary, mostly non-binding summary…
- A few patterns explain why people assume there's a meaningful difference: - Industry habit.
- Whatever the document is called, the questions that actually determine your legal position are the same: 1.
You're partway into negotiating the sale of a business, and the other side sends over a "term sheet" instead of the "letter of intent" your lawyer mentioned. Is that a different, lesser document? Do you need to ask for an LOI instead? Here's the short answer, and the longer one underneath it.
The Short Answer
In Ontario business-sale practice, "term sheet" and "letter of intent" are generally treated as different names for the same kind of document — a preliminary, mostly non-binding summary of proposed deal terms, used to confirm the parties are aligned before investing in due diligence and a definitive purchase agreement. Neither term has a fixed legal meaning that distinguishes it from the other; what matters is the actual content and wording of the specific document in front of you, not its title.
You may also see the term "memorandum of understanding" (MOU) used the same way. All three labels describe the same basic category of preliminary agreement, and none of them is legally superior or inferior to the others by name alone.
Why the Confusion Exists
A few patterns explain why people assume there's a meaningful difference:
- Industry habit. Term sheets are the more common label in private equity, venture capital, and larger M&A deals; "letter of intent" is more common in main-street and lower mid-market business sales. This is convention, not a legal rule.
- Format differences. Term sheets are sometimes formatted as a bullet-point or tabular summary of terms, while LOIs are more often written as prose in letter format. That's a stylistic choice, not a difference in legal effect.
- Assumption that a shorter document means less commitment. A brief, bulleted term sheet can still contain a fully binding exclusivity or confidentiality clause, just as a longer prose LOI can. Length and format don't determine bindingness — the actual clause language does.
What Actually Matters (Regardless of the Title)
Whatever the document is called, the questions that actually determine your legal position are the same:
- Does it say which provisions are binding and which are not? Most well-drafted preliminary documents — whatever they're titled — explicitly carve out a short list of binding clauses (commonly confidentiality, exclusivity, governing law, and cost allocation) from an otherwise non-binding framework.
- Does it include an exclusivity period? If so, for how long, and what exactly does it restrict the seller from doing?
- Does it include a break fee or other financial consequence for walking away in specified circumstances?
- Is the deal structure (asset sale vs. share sale) specified, even if the price and other terms remain open?
A one-page term sheet that answers these questions clearly is more useful, and arguably more protective, than a five-page letter-format LOI that leaves them ambiguous.
A Side-by-Side Look
| Term Sheet | Letter of Intent | |
|---|---|---|
| Typical format | Bullet points / table | Prose, letter style |
| Common in | Larger M&A, PE/VC deals | Main-street and lower mid-market sales |
| Legally binding by default? | No — depends on the specific clauses | No — depends on the specific clauses |
| Can include exclusivity? | Yes | Yes |
| Can include a break fee? | Yes | Yes |
| Governs how a deal proceeds? | Yes, in the same functional way | Yes, in the same functional way |
The two columns describe format and convention — not two different legal categories.
Frequently asked questions
If I'm sent a "term sheet," should I insist on an LOI instead?
No — the title doesn't change your legal position. What matters is reviewing the actual clauses: what's binding, what the exclusivity terms are (if any), and whether the deal structure is clearly stated. Ask your lawyer to review the document itself, not just its label.
Is a memorandum of understanding (MOU) weaker than an LOI?
Not inherently. "MOU" is a third common label for the same category of preliminary document. Some people use it to signal an even earlier, looser stage of discussion than a term sheet or LOI, but there's no fixed legal rule that makes an MOU less binding — again, the specific wording controls.
Can a term sheet be legally binding in its entirety?
Yes, in principle — nothing stops parties from drafting a "term sheet" that is fully binding from signing, if that's genuinely what they intend and the wording reflects it. This is unusual for early-stage business-sale negotiations but not impossible, which is exactly why the document's actual language matters more than its title.
Does it matter which one my industry typically uses?
Not legally — but matching convention can smooth negotiations, since the other side may have expectations shaped by what's typical in their sector. If you're unsure which format fits your deal, ask your lawyer; the underlying protections you need can be built into either.
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