The Surprise Buyer: Reading a Letter of Intent Before Signing

The situation

Jomar started on the shop floor of a small precision metal-fabrication business in Brantford twenty years ago, running the machines that cut and stamp parts for equipment manufacturers. He and his business partner, Tarek, bought the company from its retiring founder about a decade later and built it into a roughly 45-person operation with a steady book of industrial clients. Neither of them had ever tried to sell it, and neither expected to start any time soon.

That changed on a Tuesday when Jomar took a call from Rania, an associate at a private equity fund that had recently been buying up small manufacturers across southwestern Ontario. Rania was polite, well prepared, and moving fast. The fund had modelled the shop's likely revenue from public trade data and industry filings, and wanted to talk about an acquisition in the range of $11 million. Within two weeks, a draft letter of intent arrived by email, along with a request to sign a non-disclosure agreement so the buyer's team could begin financial due diligence.

A letter of intent, sometimes called a term sheet, is not usually a binding contract to sell the business. It sets out the price and structure the parties intend to work toward, and it is meant to guide the definitive agreements that follow. But certain clauses inside a letter of intent can bind the parties immediately, even though the sale itself is not yet final — and those are exactly the clauses that need the closest reading before anyone signs.

What the review found

Jomar and Tarek brought the draft letter of intent and the accompanying non-disclosure agreement to our team before signing either one. Sellers who are approached unsolicited are often flattered and eager to keep the buyer's interest, and buyers who initiate these approaches know it. The draft in front of us was well-drafted, professional, and structured almost entirely to the buyer's advantage.

Three problems stood out. First, the non-disclosure agreement defined the buyer broadly enough to include all of its affiliates, which for a private equity fund can mean every other company in its portfolio — including, as it turned out, a competing fabrication business the fund had acquired the previous year in a neighbouring region. As written, sensitive information about the Brantford shop's pricing, customer list, and supplier relationships could flow to a direct competitor under cover of the same due diligence process, with no separate agreement or restriction of its own.

Second, the letter of intent asked for 120 days of exclusivity — a commitment that Jomar and Tarek would not discuss a sale with anyone else while the buyer conducted due diligence. Exclusivity periods are standard in acquisitions; buyers reasonably want assurance they are not spending money on due diligence for a company that might sell to someone else. But 120 days is a long window for a business this size, and the draft offered no break fee or other compensation if the buyer walked away at the end of it, and no proof that the fund's financing was actually committed rather than merely contemplated.

Third, the letter of intent included a broadly worded material adverse change clause, sometimes called a MAC clause. This kind of provision lets a buyer walk away from, or renegotiate, a deal if something significantly damages the target business between signing and closing. The draft's version was not limited to major disruptions — it was written widely enough that an ordinary seasonal dip in monthly revenue, the kind the shop saw every winter when several industrial clients slowed production, could arguably qualify. Combined with a long exclusivity period and no minimum price protection, that language gave the buyer a realistic path to using a normal, predictable slow season as leverage to cut the price after the shop had already been locked out of the market for four months.

None of these terms were unusual on their own. Together, and in combination with an approach that was moving quickly, they created a real risk: months of exclusive commitment, a genuine chance of sensitive information reaching a competitor, and a price that could still move against the sellers at the end of it all.

What we did

1. Held the non-disclosure agreement back from signature until the affiliate language was fixed. We proposed a narrower definition limited to the acquiring entity and the specific individuals working on the deal, with any information-sharing to affiliated portfolio companies expressly excluded unless the seller agreed in writing. The buyer's counsel accepted the change without resistance once it was raised directly — it is a common oversight in template agreements, not usually a deliberate trap, but it needs to be caught before signing rather than after.
2. Shortened the exclusivity period and added a break fee. We negotiated the exclusivity window down to 60 days, with a modest break fee payable to Jomar and Tarek if the buyer walked away without cause after that period, and a requirement that the buyer provide written confirmation from its fund of committed capital before exclusivity began. This gave the sellers a faster path back to the market if the deal fell apart, and some compensation for the time and opportunity cost of being off it.
3. Narrowed the material adverse change clause to something specific and measurable. Rather than the broad, undefined language in the draft, we negotiated a version that excluded ordinary seasonal fluctuations, general industry or economic conditions, and anything disclosed to the buyer during due diligence — and required any claimed adverse change to be both material and reasonably outside the sellers' control. This closed off the most likely route for the buyer to use a predictable winter slowdown as a bargaining chip after months of exclusivity had already passed.
4. Reviewed the buyer's financing and reputation before recommending the clients proceed. Private equity buyers vary widely in how deals are actually funded and how portfolio companies are run after closing. We asked for evidence of the fund's committed capital for this size of transaction and looked at how its other Ontario acquisitions had gone, so Jomar and Tarek were negotiating with a clear picture of who they were dealing with, not just the offer on paper.
5. Built a clean indemnification structure into the eventual purchase agreement. Indemnification clauses set out how much of the price sellers might have to return, and for how long, if problems with the business surface after closing. We capped the sellers' post-closing exposure and set a defined time limit, so a successful sale would not leave Jomar and Tarek financially exposed to claims arising long after they had handed over the business.

The outcome

With the non-disclosure agreement and letter of intent corrected, Jomar and Tarek signed and moved into a due diligence period that ran through the fall and into the following winter. The narrowed material adverse change clause mattered in practice: revenue did dip in December and January exactly as it had every prior year, and the buyer's team raised it during a review call. Because the clause specifically excluded ordinary seasonal patterns and required the change to be outside the sellers' control, the point went nowhere, and the conversation moved on without any attempt to renegotiate price.

The sale closed the following spring at a price close to $12 million, within the range the buyer had originally proposed, with the capped and time-limited indemnification protecting Jomar and Tarek from open-ended post-closing exposure. No information ever reached the competing portfolio company, because the narrowed confidentiality terms meant it was never permitted to in the first place.

The real value of the engagement showed up in what never happened. Had the original letter of intent gone unchanged, the shop's pricing and customer data could have reached a direct competitor months before any deal was certain to close. A 120-day exclusivity period with no financing proof could have left Jomar and Tarek locked out of the market on the strength of a buyer that was never fully funded to begin with. And the broad adverse change language could have handed the buyer a plausible argument to cut the price by a meaningful amount, using nothing more than an ordinary winter slowdown as its justification. None of that came to pass, because it was caught and rewritten before anyone signed.

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