What Is a Letter of Intent When Buying a Business in BC?

If you are buying or selling a business for the first time, someone will probably suggest a letter of intent, often called an LOI. It is a short document, but the terms in it shape the rest of the deal.

This article explains what an LOI usually covers, where it fits before the purchase agreement, and what is worth settling early in British Columbia. It cannot say how a court would treat your particular letter, which depends on the wording.

This article covers the law of British Columbia.

What a letter of intent is

A letter of intent is a written summary of the main terms the buyer and seller have agreed in principle. It usually comes after early talks and before the detailed purchase agreement. Its job is to confirm that you are both on the same page, so you do not spend time and money on legal drafting for a deal that is far apart on basics.

Letters of intent are not all written the same way, and how a particular clause works depends on its wording and your situation, so it is worth confirming with a lawyer. Which parts bind you depends on the wording, so ask a lawyer to read it before you sign.

Where it fits in the sale

• Early talks: the buyer and seller discuss price and general terms.
• Letter of intent: the main terms are written down.
• Checking the business: the buyer looks into the business. Which checks are needed depends on the deal, so it is worth confirming with a lawyer or accountant.
• Purchase agreement: the lawyers draft the full contract.
• Closing: the price is paid and the business changes hands.

Terms worth settling in the letter

• Whether you are buying shares or assets. In a share sale, the buyer takes the company with its history and liabilities.
• The price and how it will be allocated. On an asset purchase the price is allocated to each asset at fair market value, with the balance attributed to goodwill.
• What is included, such as equipment, inventory, receivables, any land or lease, and the employees.
• The deposit and when it is paid.
• How long the buyer has to check the business, and which conditions must be met.
• The target closing date.
• Confidentiality, and whether the seller will deal only with this buyer for a set time.

Points the buyer should plan for early

Several issues are easier to handle if they are in the LOI than if they come up late. These come up often:

• Liens and loans: the BC Personal Property Registry records security agreements and commercial liens. A buyer usually searches through Service BC, a mailed request, or a lawyer or search agent, because direct online access is limited to professionals with a premium account. Builders' liens and some other liens are filed elsewhere. If the seller's lender holds a registration, a written demand can require it to register a change within 40 days.
• PST: a buyer should obtain a PST clearance certificate before buying a business, or risk liability for the seller's outstanding PST. The collector's consent is needed.
• Employees: if all or part of a business is disposed of, employment is deemed continuous for the purposes of the Employment Standards Act, so the buyer takes on obligations to employees who stay. There are exceptions. If the seller terminates employees before the sale, the seller owes their wages and compensation and the buyer is not liable, and employees who refuse to work for the buyer without substantial changes to their conditions are deemed to have quit. Where a trustee in bankruptcy sells the business as a going concern, the buyer is not liable for wages owed before the bankruptcy and prior service is not treated as continuous.
• GST/HST: if the buyer acquires at least 90% of the property needed to carry on the business, the parties may jointly elect on Form GST44 so no GST/HST is payable on the sale. The election is unavailable where the seller is a registrant and the buyer is not, and GST/HST can still apply to certain services, leases and licences, and, for buyers who are not registrants, sales of real property.
• Land: a contract respecting land is not enforceable unless there is a signed writing, an act or acquiescence by the party to be held, or reasonable reliance; paying or accepting a deposit counts as such an act.

What to do next

Treat the LOI as the first step in a legal process rather than a formality. Settle the structure and key terms before you sign, and ask which clauses are meant to bind you. After closing, claims for misrepresentation or breach of warranty generally must start within 2 years of when the claim is discovered, and the period can be extended by a signed written acknowledgment of liability.

• Write down the terms you want, using the list above.
• Ask a lawyer to review the draft letter before you sign.
• Ask the seller to agree to cooperate with searches and the PST clearance application.
• Ask an accountant how the structure affects tax.
• Keep copies of every version you exchange.

Frequently asked questions