The Letter of Intent That Wasn't Really Non-Binding

The situation

Genevieve and Micheline had built a Toronto software company together over eight years, Genevieve running the product and engineering side as the company's lead developer, Micheline handling the finances and contracts as its accountant. Between them they had grown the business to a comfortable, profitable size, but growth by acquisition was new territory. When a smaller competitor came up for sale, run by its founder Abirami, it looked like an obvious move: overlapping customers, complementary technology, a chance to add roughly $2 million in annual revenue without building it from scratch or fighting the competitor for market share for another two years.

The two sides negotiated the outline of a deal directly, without lawyers involved at that stage. Abirami's asking price was around $3.2 million, based on a multiple of her reported annual revenue. After a few weeks of back-and-forth over email, they landed on a one-page letter of intent, a short document meant to record the agreed price and general terms before the real due diligence and drafting began. Genevieve downloaded a template she found online, filled in the numbers, and both sides signed it the same week, mostly so each could tell their own advisors a deal was in motion. It felt like paperwork, not a contract, and neither side thought to have a lawyer look at it first — the real legal work, they assumed, would come later, once the purchase agreement itself was drafted.

The legal problem

A letter of intent, sometimes called a term sheet, is usually meant to be non-binding on the core deal terms — the price can still move, either side can still walk away without penalty — while a small number of specific clauses are deliberately binding, most commonly confidentiality and exclusivity. Exclusivity clauses stop the seller from shopping the business to other buyers while the parties work toward a final agreement, and they exist precisely because buyers want assurance before spending money on accountants and lawyers to investigate the target. The two ideas, non-binding deal terms and binding process obligations, are supposed to sit side by side in the same document, clearly separated.

The template Genevieve used did include a non-binding statement, but it was worded narrowly, applying only to the price and the closing date. The exclusivity clause, the confidentiality clause, and a paragraph committing both sides to "use best efforts to complete the transaction on the terms set out above" were not qualified by that statement at all. Read together, a court could reasonably treat that last phrase as a binding promise to proceed in good faith on those terms, not just an expression of hope. It was the kind of gap that a lawyer drafting the letter from scratch would have closed as a matter of routine, but a downloaded template, written for no particular deal and no particular jurisdiction, had simply never accounted for.

The problem surfaced six weeks later, once real due diligence started. Micheline, reviewing Abirami's financials line by line, found that close to 40 percent of the competitor's revenue came from two customer contracts that were both up for renewal within the year, with no long-term commitments in place and no automatic renewal terms protecting the revenue going forward. That concentration risk hadn't been visible in the summary numbers Abirami had shared earlier in the negotiation, and it materially changed what the business was actually worth to a buyer planning to hold it for the long term. Genevieve and Micheline wanted to renegotiate the price down by several hundred thousand dollars to reflect that risk, or walk away from the deal entirely if Abirami wouldn't move. Abirami's position, once she brought in her own lawyer, was that the letter of intent obligated them to proceed in good faith on the original terms, and that backing out now amounted to a breach of a binding agreement rather than a normal renegotiation.

What we did

1. Reviewed the letter of intent clause by clause. Our team read the document the way a court would, separating what the non-binding statement actually covered from what it left exposed. The exclusivity and best-efforts language were the real risk; the price and closing date were not.
2. Assessed the strength of a breach claim realistically. A best-efforts clause is not the same as a firm obligation to close. Courts generally read it as a duty to negotiate in good faith, not a guarantee of a completed sale — but proving good faith negotiation had occurred, after our clients walked away over a legitimate due diligence finding, still meant time, uncertainty, and legal cost on both sides if it went to a dispute.
3. Documented the due diligence finding as the basis for withdrawal. The customer concentration issue was real and material, not a pretext. We put the finding in writing to Abirami's lawyer immediately, framing the withdrawal as a response to information that came to light after the letter of intent was signed, not a change of heart about the deal in general.
4. Opened a negotiated exit instead of litigating the clause. Fighting over whether the letter of intent was binding would have cost more in legal fees and delay than most reasonable settlements, with no certain outcome either way. We proposed a clean termination in exchange for a payment to cover Abirami's costs and lost time, positioning it as cheaper and faster for both sides than a dispute over an ambiguous one-page document.
5. Negotiated the payment down from the initial demand. Abirami's lawyer opened at $150,000, treating it as compensation for a near-complete deal. We countered based on her actual documented costs and the weeks of exclusivity she'd been bound to, not a percentage of the abandoned purchase price, and closed the gap from there.

The outcome

The matter settled without a claim being filed. Genevieve and Micheline paid Abirami roughly $45,000 to terminate the letter of intent cleanly, with signed mutual releases so neither side could revisit the deal or the breakdown later. That figure covered Abirami's legal and advisory costs during the exclusivity period plus a modest allowance for the weeks she had spent unable to talk to other buyers about a competing sale. The whole exit, from the first letter to Abirami's lawyer to the signed release, took about five weeks — slower than either founder wanted, but far faster than a filed claim would have moved through the Superior Court.

It was not a win. The $45,000 was money spent on a deal that never closed, and it would not have been spent at all if a lawyer had reviewed the letter of intent before either side signed it. Genevieve and Micheline were candid with themselves about that afterward: the mistake was theirs, made in the rush to look serious to a seller they were competing for, not something that could be pinned on Abirami or on bad luck. But the $45,000 was also a fraction of what a breach of contract claim over the $3.2 million transaction could have cost in legal fees, management time, and settlement exposure if Abirami had pushed harder and the dispute had gone further. Genevieve and Micheline kept their company's cash and attention for a healthier acquisition target the following year, one where the letter of intent went through counsel from the first draft rather than the last step before a decision they'd already made.

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