Buying or selling a business can begin with a conversation, but it should not remain a handshake deal for long.
Before the parties spend significant time and money on due diligence and definitive purchase agreements, they will often prepare a Letter of Intent, commonly called an LOI. This document records the main commercial terms of the proposed transaction and establishes the framework for the negotiations that follow.
An LOI is preliminary, but it is not casual. Poorly considered language can create binding obligations, lock a seller into exclusivity or establish financial terms that become difficult to change later.
Here is what Canadian business owners should understand before drafting, sharing or signing one.
What is a Letter of Intent?
A Letter of Intent outlines the principal terms on which a buyer proposes to acquire a business.
It usually appears after the buyer and seller have held initial discussions but before they negotiate the final Share Purchase Agreement or Asset Purchase Agreement. Its purpose is to confirm that the parties are sufficiently aligned to justify moving forward.
An LOI commonly addresses:
- The proposed purchase price
- What the buyer is acquiring
- How and when the price will be paid
- Due diligence
- Conditions that must be satisfied
- Exclusivity
- Confidentiality
- The expected closing date
- The seller’s role after closing
- The transition of employees and customer relationships
Most commercial terms are commonly described as non-binding until the parties sign a definitive agreement. Other provisions may be intended to take effect immediately.
This distinction must be stated clearly.
A free starting point for Alberta transactions
Parties often begin with a generic template that leaves out important deal mechanics. Alberta buyers and sellers can instead use the free Letter of Intent Builder from Outsiders Law to generate a structured draft for an Alberta share purchase.
The tool asks users about purchase price, payment mechanics, earnouts, vendor financing, working capital, conditions, exclusivity and other key provisions. It can produce buyer-friendly, seller-friendly or neutral language based on the information provided.
The resulting document is a starting point, not legal advice or a finished agreement. Outsiders Law expressly recommends having an experienced mergers and acquisitions lawyer review the draft before it is shared or signed.
Because the builder is designed for Alberta transactions and uses Alberta governing law, parties in Ontario or another province should obtain advice from counsel in their own jurisdiction.
Is an LOI legally binding?
The answer is more complicated than a simple yes or no.
An LOI is often structured so the proposed purchase price and transaction remain subject to due diligence, negotiation and execution of definitive agreements. However, specific sections may be binding as soon as both parties sign.
Potentially binding provisions often include:
Confidentiality
The parties may agree to protect information about the business, its finances, employees, customers and the proposed transaction.
A seller may provide highly sensitive records during due diligence. The LOI should work with an existing confidentiality agreement or explain how confidential information must be handled.
Exclusivity
An exclusivity or “no-shop” provision can prevent the seller from soliciting, discussing or accepting competing offers for a specified period.
This gives the buyer time to conduct due diligence and arrange financing. It also removes the seller from the market temporarily, so the length and scope of the restriction deserve careful attention.
Public announcements
The parties may agree that neither side will publicly disclose the proposed transaction without the other’s consent.
This can protect employees, customers, suppliers and the value of the business from uncertainty caused by a premature announcement.
Expenses
The LOI may specify whether each party is responsible for its own accounting, legal, financing and advisory costs.
Governing law and dispute resolution
The parties may choose which province’s laws apply and where disputes connected to the binding provisions will be handled.
Calling a document “non-binding” does not necessarily make every sentence non-binding. Its wording and the conduct of the parties matter. Professional review should happen before signing, not after a disagreement emerges.
Share purchase or asset purchase?
The LOI should identify what the buyer plans to acquire.
In a share purchase, the buyer acquires shares of the corporation. The company continues to own its assets and remain responsible for its obligations, subject to the deal terms.
In an asset purchase, the buyer acquires selected assets and may assume specified liabilities. Those assets might include equipment, inventory, intellectual property, contracts, customer lists or goodwill.
The structures can produce significantly different legal and tax consequences. They may also require different third-party consents.
The LOI should not leave the transaction structure ambiguous.
Define the purchase price carefully
A headline price rarely tells the full story.
Two offers for $5 million may deliver very different economic outcomes. One might provide the entire amount in cash at closing, while another includes a future earnout, seller financing or a substantial holdback.
The LOI should explain:
- The total proposed consideration
- Cash payable at closing
- Shares or other securities offered by the buyer
- Debt that must be repaid
- Earnout amounts
- Vendor take-back financing
- Deposits
- Holdbacks or escrow
- Working-capital adjustments
- Treatment of cash and debt
- Assumed liabilities
A seller should understand not only the potential purchase price but how much is reasonably expected to be received at closing.
Be precise about earnouts
An earnout makes part of the purchase price dependent on the business achieving specified results after closing.
It can help bridge a valuation gap. The seller may believe the company will grow rapidly, while the buyer may be unwilling to pay upfront for performance that has not occurred.
Earnouts can also create disputes.
If the buyer controls the company after closing, its decisions may affect revenue, expenses and the financial metric used to calculate the earnout. The LOI should address the measurement period, accounting policies, performance targets and the buyer’s obligations when operating the business.
Questions to consider include:
- Is the earnout based on revenue, gross profit or EBITDA?
- Which financial records control the calculation?
- Can expenses from another part of the buyer’s organization be allocated to the acquired company?
- What happens if the buyer changes the product, pricing or sales team?
- Can the business be merged into another operation?
- How are calculation disputes resolved?
- What happens if the buyer sells the business during the earnout period?
These points should be examined before the seller agrees to a headline earnout number.
Understand vendor take-back financing
A vendor take-back note allows the buyer to pay part of the price over time. In practical terms, the seller becomes one of the buyer’s lenders.
Seller financing can make a transaction possible when the buyer cannot fund the entire purchase price at closing. It can also signal the seller’s confidence in the business.
The arrangement carries risk. The buyer may default after taking control.
The parties should consider:
- Interest rate
- Repayment schedule
- Security
- Personal guarantees
- Ranking behind a bank or senior lender
- Default remedies
- Early repayment rights
- Financial reporting during the loan
- Tax consequences
A promise to pay later is not equivalent to cash received at closing.
Do not ignore working capital
Working capital disputes are common because buyers and sellers may have different ideas about the financial condition in which the business should be delivered.
A buyer generally expects enough working capital to continue operating after closing. A seller may expect to retain cash or collect certain receivables.
The LOI can establish the agreed approach before accountants begin detailed calculations.
It should address:
- The target working-capital amount
- How the target will be calculated
- Which accounts are included
- The accounting policies to be used
- Whether the purchase price will be adjusted after closing
- How disputes about the final calculation will be resolved
Leaving this issue vague can produce a substantial difference between the advertised price and the amount ultimately paid.
Set the scope of due diligence
Due diligence allows the buyer to verify what it is purchasing and identify risks.
The LOI should describe the general areas the buyer may investigate and the expected access to information. Typical areas include:
- Corporate records
- Financial statements
- Tax filings
- Customer and supplier contracts
- Employment matters
- Intellectual property
- Litigation
- Regulatory compliance
- Real estate
- Insurance
- Privacy and cybersecurity
- Environmental matters
- Debt and liens
The seller should protect sensitive information, particularly customer identities, employee details and trade secrets. Highly sensitive records may be disclosed in stages or subject to additional safeguards.
The LOI should also establish a realistic due-diligence period.
Identify the conditions to closing
A transaction may depend on events that have not yet occurred.
Common conditions include:
- Satisfactory completion of due diligence
- Buyer financing
- Board or shareholder approval
- Landlord consent
- Assignment of important contracts
- Regulatory approval
- Retention of key employees
- Execution of employment or consulting agreements
- Receipt of third-party consents
- No material deterioration in the business
Conditions should be described clearly enough that both parties understand what must happen before they are expected to close.
A condition that depends entirely on one party’s subjective satisfaction can create uncertainty. A lawyer can help determine whether objective standards or deadlines should be added.
Address the seller’s role after closing
The buyer may want the seller to remain temporarily to introduce customers, train management or transfer operational knowledge.
The LOI should outline:
- The expected transition period
- Whether the seller will be an employee or consultant
- Compensation
- Hours and responsibilities
- Decision-making authority
- Benefits and expenses
- Termination rights
- Restrictive covenants
A seller who expects to leave immediately should not assume that the buyer has the same expectation.
Watch the exclusivity period
A buyer needs time to investigate the company and negotiate final agreements. A seller should not remain unavailable to other buyers indefinitely.
The exclusivity period should reflect the transaction’s complexity and the work required to close. The LOI may also establish milestones, such as deadlines for beginning due diligence, obtaining financing or delivering a first draft of the purchase agreement.
A seller may seek the right to terminate exclusivity if the buyer stops progressing. A buyer may want an extension when delays are outside its control.
These terms affect negotiating leverage and should not be dismissed as boilerplate.
Common LOI mistakes
Buyers and sellers frequently create avoidable problems by:
- Signing before obtaining legal and tax advice
- Focusing only on the headline purchase price
- Leaving working capital undefined
- Agreeing to an earnout without operating protections
- Accepting an overly long exclusivity period
- Failing to distinguish binding and non-binding provisions
- Using an asset-purchase template for a share transaction
- Ignoring third-party consents
- Leaving the seller’s transition role unclear
- Assuming difficult terms can be renegotiated later
- Treating seller financing as though it were cash
- Sharing sensitive records without confidentiality protections
The definitive purchase agreement may contain far more detail, but it is often negotiated within the commercial boundaries established by the LOI.
How to prepare before drafting
Before creating an LOI, the parties should answer several basic questions:
- What is being purchased?
- What is the proposed value?
- How will the price be paid?
- Which liabilities will the buyer assume?
- Does the buyer need financing?
- Will the seller remain involved?
- Which contracts require consent?
- How much working capital must remain?
- What due diligence is required?
- Which provisions should be legally binding?
- How long should exclusivity last?
- What issues still require professional advice?
If a term is unknown, identify it as unresolved rather than guessing. An incorrect number or structure can become difficult to retract after it has been presented to the other side.
A framework, not a substitute for advice
A well-prepared Letter of Intent can save time by revealing disagreements before the parties invest heavily in the transaction. It can also give lawyers, accountants and lenders a clearer framework for completing the deal.
However, an LOI can create meaningful legal, tax and financial consequences. Templates and document builders are useful for organizing terms, but they cannot evaluate negotiating leverage, identify every deal-specific risk or provide individualized advice.
Use the LOI to establish alignment, not to avoid professional review. Getting the structure right at the beginning is usually easier—and less expensive—than trying to repair it when closing is approaching.
This article provides general information only and does not constitute legal, tax, accounting or financial advice. Laws and transaction practices vary by jurisdiction. Consult qualified advisers before sharing or signing a Letter of Intent.
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