A plain-language walk through the letter of intent on an Ontario business purchase: the terms it should cover, the clauses that bind, and the traps.
⚖️ This is general information, not legal advice. It can't account for your specific situation. Use it to get oriented, then confirm the details with a licensed Ontario lawyer.
A letter of intent is the first document most buyers and sellers sign, and the one they read least carefully. It is short, it says it is non-binding, and the broker has a form. Yet the LOI sets the price, the structure and the timetable, and its binding clauses on exclusivity, confidentiality and deposits can cost real money if the deal fails. This guide explains what a good LOI covers, what actually binds you in Ontario, and which points are better left for the purchase agreement.
What an LOI should say
- The parties, including the corporation you will buy through if you already know it
- The price, how it is paid (cash, financing, vendor take-back, earn-out) and any working capital or inventory target
- Whether you are buying assets or shares and, if assets, which are included and excluded
- The deposit: amount, who holds it in trust, and when it is refundable or forfeited
- Conditions: financing, satisfactory diligence, landlord consent, franchisor consent, licence transfers, offers accepted by key employees
- The target closing date and an outside date after which either side may walk away
- The exclusivity period and what happens to it if the seller is slow delivering documents
- Confidentiality: who may see information, what it may be used for, and what happens to it if the deal fails
- Who pays their own costs, and any break fee
- Governing law: Ontario
What binds and what does not
In Ontario a document binds when the parties intended to be bound and the essential terms are certain. The label does not decide. An LOI that says the deal terms are non-binding and that no obligation to buy or sell arises until a definitive agreement is signed will normally be read that way. But the same LOI usually makes specific clauses binding on purpose: confidentiality, exclusivity, costs, governing law and sometimes a break fee.
The danger is language that reads as a promise: the buyer will purchase, the seller agrees to sell, or a signature block with no non-binding statement at all. Courts also look at conduct. A party that acts as if the deal were done, for example by taking possession or letting the other side incur large costs on the strength of the LOI, may find it harder to argue that nothing was agreed.
Deposits
- Held in trust by a lawyer or broker, never paid to the seller directly
- Refundable if a stated condition fails; the LOI should say which conditions
- Forfeited only where the LOI says so, and only for the buyer's own default
- Applied to the price on closing
- Interest: say who gets it, or expect an argument over a small sum
Exclusivity
Exclusivity protects the buyer's investment in diligence. Sixty to ninety days is common for a small business. Link the period to the seller's obligation to deliver documents within a set number of days of each request, with an automatic extension if the seller is late. Say whether the seller may continue to talk to other buyers without negotiating, and whether it must tell you if another offer arrives. A seller, for its part, should insist that exclusivity ends automatically if the buyer misses a financing or diligence date.
Leave for the purchase agreement
- Detailed representations and warranties; the LOI can say customary representations and stop there
- Indemnity caps, baskets and survival periods, unless one of them is a deal-breaker for you
- The exact list of assumed contracts and liabilities
- Employee terms beyond the principle that offers will be made to listed employees
- The transition period in detail; the LOI can record its length and whether it is paid
Common traps
- An LOI that fixes the structure before anyone has had tax advice
- Exclusivity that keeps running while the seller holds back documents
- A deposit whose refund conditions are silent
- A confidentiality clause with no end date and no obligation to return or destroy information
- A financing condition with no date by which financing must be confirmed
- No outside date, so the deal can drift for months with the deposit tied up
How Treadstone Law can help
A good LOI is short, honest about what it does not decide, and precise about the few things it does. Have it reviewed before you sign; the cost is small next to the cost of untangling a bad one.
Treadstone Law handles corporate matters on a transparent flat fee, with online intake and a real lawyer on your file, across Ontario.
- Start your file online at treadstonelaw.ca/start-file
- See flat-fee pricing at treadstonelaw.ca/pricing
- Learn more about our corporate services at treadstonelaw.ca/corporate
- Or call us: 1-844-900-1070
This is not legal advice
This guide is general information, not legal advice. Reading it does not create a lawyer-client relationship. Ontario laws and government programs change, and how the law applies depends on your specific facts. For advice about your situation, speak with a licensed Ontario lawyer. Treadstone Law is licensed by the Law Society of Ontario — reach us at 1-844-900-1070 or start a file online.