What does a letter of intent do when I am buying a business?

What a letter of intent usually covers

A letter of intent, or LOI, is the short document that turns a conversation into a deal outline. It normally records the price and how it will be paid, whether you are buying assets or shares, what is included and excluded, any working capital or inventory target, the deposit, the conditions you need (financing, lease consent, satisfactory due diligence), the target closing date and how long you have exclusive negotiating rights.

It is deliberately brief. The detail comes later in the purchase agreement. But the LOI fixes the starting point for everything that follows, and terms that were easy to agree in principle are hard to reopen once both sides have relied on them.

Which parts bind you

Whether a document is binding in Ontario turns on what the parties intended and whether the essential terms are certain, not on its title. Most LOIs say the deal terms are non-binding and that neither side is obliged to close until a definitive agreement is signed. A few clauses are usually made binding on purpose: confidentiality, exclusivity (also called a no-shop), who pays their own costs, governing law and sometimes a break fee.

Read the binding clauses as if they were the whole contract, because for a while they are. An exclusivity period that runs longer than your diligence needs, or a deposit that is not clearly refundable, can cost you real money if the deal falls over.

Deposits and exclusivity

A deposit shows commitment and is usually held in trust by a lawyer or the broker until closing. The LOI should say when it is refundable, for example if your financing or lease condition is not met, and when it is forfeited. If the LOI is silent, expect an argument.

Exclusivity stops the seller from marketing the business to others while you spend money on accountants, searches and lawyers. Tie the period to a realistic diligence schedule and to the seller's obligation to deliver documents promptly. A short period with a right to extend if the seller is slow is usually fairer to both sides than one long fixed window.

Where a lawyer and an accountant fit at this stage

The most consequential line in an LOI is often the one that says assets or shares. It changes what you take on, how the price is taxed and what consents you need, so it is worth a conversation with your accountant before you sign rather than after. We review the LOI for binding language, for the conditions you will actually need, and for anything that will be awkward to walk back in the purchase agreement.

Brokers often supply a standard LOI. It is a fine starting point, but it was drafted to move the deal forward, not to protect either party in particular.