Letter of Intent for Buying or Selling a Business in Ontario
Before buyers and sellers negotiate a complete purchase agreement, they often prepare a letter of intent.
A letter of intent, commonly called an LOI, records the principal terms of a proposed business transaction. It can establish the anticipated purchase price, transaction structure, due diligence period, financing conditions, exclusivity obligations, and intended closing date.
An effective LOI helps the parties determine whether they have enough agreement to move forward. However, an unclear LOI can create a dispute about whether the parties have already entered a binding contract.
The document should clearly identify which provisions are binding and which remain subject to negotiation and execution of a final agreement.
What Is a Business Purchase Letter of Intent?
A business purchase LOI is a preliminary document outlining the proposed terms for acquiring a business or an ownership interest in a corporation.
It may be used for:
A purchase of corporate shares
A purchase of business assets
A shareholder buyout
An investment in a private company
A merger or other business combination
The LOI creates a framework for due diligence and preparation of the final purchase agreement.
It is generally shorter and less detailed than an asset or share purchase agreement. It does not usually contain the complete representations, warranties, indemnities, closing documents, and risk-allocation provisions required for the final transaction.
Is a Letter of Intent Legally Binding in Ontario?
It depends on the wording and circumstances.
Calling a document a “letter of intent” or stating that a formal agreement will be prepared later does not automatically make the document non-binding.
Ontario courts may consider:
The words used in the LOI
Whether the essential terms have been agreed upon
Which matters remain unresolved
Whether the document expressly states that it is non-binding
The conduct of the parties after signing
Whether the parties began performing the proposed transaction
Whether the circumstances demonstrate an intention to be bound
In Wallace v. Allen, 2009 ONCA 36, the Ontario Court of Appeal found that a business-purchase LOI was binding based on its contractual language, the terms included, and the parties’ conduct.
The LOI should therefore state expressly whether the proposed purchase remains subject to negotiation and execution of a definitive agreement.
Separate Binding and Non-Binding Terms
Many LOIs contain both binding and non-binding provisions.
Commercial terms that are often intended to be non-binding include:
The proposed purchase price
The transaction structure
Payment terms
Purchase-price adjustments
The proposed closing date
Proposed transition arrangements
Anticipated representations and warranties
The buyer’s intention to obtain financing
Provisions that may be intended to bind the parties immediately include:
Confidentiality
Exclusivity
Access to information
Responsibility for professional fees
Public announcements
Governing law
Dispute resolution
Return or destruction of confidential information
The LOI should identify these categories clearly. A general statement that the entire document is non-binding may unintentionally undermine provisions the parties expect to enforce.
Identify the Transaction Structure
The LOI should state whether the buyer proposes to acquire shares or assets.
In a share purchase, the buyer acquires an ownership interest in the corporation. The corporation generally continues owning its assets, owing its liabilities, employing its workers, and remaining a party to its existing contracts.
In an asset purchase, the buyer acquires specified assets and assumes only those liabilities identified in the agreement.
The structure can significantly affect taxes, employees, contracts, licences, liabilities, and required third-party consents.
If the parties have not finalized the structure, the LOI can state that it remains subject to tax, legal, and accounting advice. However, the parties should resolve the structure early because it affects nearly every other term of the transaction.
Describe What Is Being Purchased
The LOI should identify the proposed subject of the sale.
For a share transaction, this may include:
The number and class of shares
The percentage of the corporation being acquired
The selling shareholders
Any shares or interests excluded from the transaction
For an asset transaction, it may identify:
Equipment and inventory
Customer and supplier contracts
Intellectual property
Accounts receivable
Websites and domain names
The business name
Goodwill
Assumed liabilities
Excluded assets and liabilities
The description does not need to contain every closing detail, but it should be clear enough to prevent the parties from negotiating different transactions.
Establish the Proposed Purchase Price
The LOI should state the proposed price or explain how it will be calculated.
It may provide for:
Cash at closing
A deposit
Instalment payments
Vendor financing
A promissory note
An earnout
A holdback
Shares or other consideration
A combination of payment methods
The parties should clarify whether the stated price is fixed or subject to adjustment for cash, debt, working capital, inventory, transaction expenses, or other financial measures.
If the price depends on financial information that has not yet been verified, the LOI should make the proposal subject to due diligence and agreement on the adjustment process.
Address Deposits Carefully
A seller may request a deposit to demonstrate the buyer’s seriousness.
The LOI should explain:
When the deposit must be paid
Who will hold it
Whether it is refundable
When it becomes non-refundable
Whether it will be credited toward the purchase price
What happens if due diligence is unsatisfactory
What happens if financing is not obtained
What happens if the seller accepts another offer
How a dispute over the deposit will be resolved
A deposit should not be described simply as “non-refundable” without addressing the circumstances in which the transaction may fail.
Establish the Due Diligence Process
The buyer will generally require access to information about the business before signing the final purchase agreement.
The LOI may identify the scope of due diligence, including:
Corporate records and ownership
Financial statements
Tax filings
Material contracts
Employees and contractors
Commercial leases
Debt and security interests
Intellectual property
Regulatory compliance
Litigation and complaints
Insurance
Customer and supplier relationships
Privacy and cybersecurity practices
The LOI should establish the due diligence period and explain how information will be provided.
The seller may require the buyer to limit access to sensitive information until the buyer demonstrates financial capacity or the transaction reaches a more advanced stage.
Include Confidentiality Protections
Due diligence may expose the buyer to commercially sensitive information.
The LOI or a separate confidentiality agreement should address:
Permitted use of the information
Who may receive it
Disclosure to lawyers, accountants, and lenders
Protection of personal information
Contact with employees, customers, and suppliers
Return or destruction of information
Continuing obligations if the transaction does not close
The buyer should not use due diligence information to compete with the seller, solicit employees, or approach customers outside the agreed process.
If the parties signed an earlier non-disclosure agreement, the LOI should confirm whether that agreement remains in effect.
Consider an Exclusivity Provision
A buyer may request an exclusivity period during which the seller cannot solicit, negotiate, or accept competing offers.
This is sometimes called a no-shop provision.
The buyer may want exclusivity because it will spend money on legal advice, accounting, financing, and due diligence. The seller may be giving up opportunities to pursue other purchasers.
The exclusivity clause should establish:
The length of the exclusivity period
Which activities are prohibited
Whether the seller must disclose unsolicited offers
Whether the period can be extended
What happens if the buyer delays
Available remedies for breach
The period should be long enough for meaningful due diligence but should not unnecessarily prevent the seller from pursuing other options.
Make the Transaction Subject to Conditions
The proposed purchase may depend on conditions such as:
Satisfactory due diligence
Buyer financing
Corporate approvals
Third-party consents
Regulatory approvals
Assignment of the commercial lease
Retention of key employees
Negotiation of transition services
Agreement on the final purchase contract
Absence of a material adverse change
The LOI should identify significant conditions without attempting to reproduce the complete closing provisions of the final agreement.
A condition should also identify which party benefits from it and whether that party may waive it.
Address Operations Before Closing
The seller may continue operating the business while the parties negotiate and complete due diligence.
The LOI may require the seller to operate in the ordinary course and obtain the buyer’s approval before taking significant actions, such as:
Borrowing substantial amounts
Selling important assets
Entering major contracts
Making unusual payments
Increasing owner compensation
Terminating key employees
Issuing shares
Distributing significant funds
These restrictions should not prevent the seller from running the business effectively during negotiations.
Plan the Seller’s Transition
The buyer may require assistance from the seller after closing.
The LOI can summarize anticipated transition terms, including:
Length of the transition
Seller availability
Introductions to customers and suppliers
Training
Consulting compensation
Continued employment
Confidentiality
Non-solicitation
Non-competition
The final purchase, employment, or consulting agreement should contain the complete terms.
Set a Timeline Without Creating Unintended Obligations
The LOI may establish target dates for:
Delivery of due diligence materials
Completion of the buyer’s review
Delivery of the first purchase-agreement draft
Financing approval
Satisfaction of conditions
Signing the definitive agreement
Closing
The document should clarify whether these are binding deadlines or planning targets.
It should also state when the LOI expires and which provisions survive termination.
Allocate Transaction Costs
Even if the transaction does not close, both parties may incur legal, accounting, valuation, and financing costs.
The LOI should establish whether each party pays its own expenses or whether another arrangement applies.
It should also address any broker, finder, or advisory fees and identify which party is responsible for them.
What Happens After the LOI Is Signed?
After signing, the parties generally proceed with:
Due diligence
Tax and transaction structuring
Financing
Third-party consent requests
Negotiation of the purchase agreement
Preparation of closing documents
Satisfaction of closing conditions
Completion of the transaction
The final agreement will contain substantially more detail than the LOI, including representations, warranties, indemnities, liability limits, closing procedures, and post-closing obligations.
Delta Law’s contract law services include drafting and reviewing letters of intent, confidentiality agreements, asset purchase agreements, share purchase agreements, and other commercial contracts.
For transactions involving corporate approvals, ownership changes, or reorganizations, review Delta Law’s corporate law services.
Avoid Signing an Informal LOI Without Review
A short document can create significant obligations.
Common problems include:
Unclear binding language
Incomplete purchase terms
An overly long exclusivity period
An improperly structured deposit
Insufficient due diligence rights
Premature commitments concerning employees
Missing financing conditions
Tax assumptions that have not been reviewed
Conduct suggesting that the parties consider themselves bound
The parties should obtain legal and tax advice before signing, particularly where the LOI contains detailed commercial terms or requires immediate performance.
For more information about business purchases, sales, and commercial agreements, visit Delta Law’s legal resources.
This article provides general information only and does not constitute legal, tax, accounting, or financial advice. Whether a letter of intent is binding depends on its wording, the parties’ conduct, and the circumstances of the proposed transaction.
Establish the Deal Before Investing in the Transaction
A carefully drafted letter of intent can confirm the proposed transaction structure, establish the due diligence process, and identify the terms that must be resolved before closing.
Delta Law assists Ontario buyers and sellers with letters of intent, business acquisitions, due diligence, purchase agreements, and related corporate and commercial matters.
