What Is a Letter of Intent When Buying a Business in Ontario?

So you have found a business you want to buy. The owner is interested in selling. Things are moving fast and suddenly someone mentions a "Letter of Intent." Maybe the seller has already sent you one. Maybe your broker is asking you to sign it. Either way, you are probably wondering: what exactly is this thing, and should I be worried about it?

This article walks you through what a Letter of Intent (LOI) is in the context of buying a business in Ontario, what it typically covers, and why it is a good idea to have a lawyer look it over before you put your name on it.

What is a Letter of Intent?

A Letter of Intent, sometimes called an LOI, a term sheet, or a memorandum of understanding, is a document that sets out the basic terms of a proposed business purchase before the formal agreement is drafted. Think of it as a starting point, not the finish line. It signals that both sides are serious and want to move forward, while the details are still being worked out.

In Ontario, LOIs are commonly used in business acquisitions of all sizes, from small local businesses to larger deals. They are usually prepared fairly early in the process, often before due diligence has even started.

An LOI can feel like a handshake on paper. Informal, quick, and easy to sign. But some parts of it may carry real legal weight, which is why it deserves more than a quick read-through.

What is usually in an LOI?

Every LOI is different, but most of them cover some version of the following:

• Purchase price and structure: how much you are offering and whether it is structured as an asset purchase or a share purchase.

• What is included in the sale: equipment, inventory, client lists, intellectual property, and so on.

• Conditions and due diligence period: how long you will have to review the business before committing.

• Deposit terms: whether a deposit is required, how much, and what happens to it.

• Exclusivity: whether the seller agrees to stop talking to other buyers while you are doing your homework.

• Confidentiality: obligations around keeping the deal and any information you receive private.

• Target closing date: when everyone hopes the deal will be done.

Is an LOI Legally Binding?

This is where things get a little more nuanced, and where people sometimes get caught off guard.

In most cases, the main body of an LOI is intended to be non-binding. That means the purchase price and general terms are just proposals, not promises you are locked into. The deal can still fall apart, and that is usually okay.

However, and this is important, certain parts of an LOI may be legally binding even if the rest is not. Depending on how the document is drafted, provisions relating to exclusivity, confidentiality, and deposits may be enforceable on their own. This means that even before you have signed any purchase agreement, you could potentially have real obligations.

Whether something is actually binding will depend on the specific wording of the document, the circumstances of the deal, and other factors. You should speak with a lawyer who can look at your particular LOI and give you proper guidance.

Deposits: What Happens If the Deal Falls Through?

Some LOIs require the buyer to put down a deposit, a sum of money held in trust while due diligence is completed. This shows the seller you are serious. But it raises an obvious question: what happens to your deposit if you walk away?

That depends entirely on what the LOI says. In some cases, deposits may be fully refundable if you exit during the due diligence period. In other cases, they may not be, or there may be conditions attached. It is worth knowing exactly what you are agreeing to before you hand over any money.

Exclusivity: Keeping the Seller Off the Market

An exclusivity clause, sometimes called a no-shop clause, prevents the seller from negotiating with other potential buyers for a set period of time. This protects you as the buyer, giving you breathing room to do your due diligence without worrying that someone else is going to swoop in and steal the deal.

If the LOI includes an exclusivity clause, it may be one of the binding provisions, which means the seller could be in breach of the LOI if they continue shopping the business around. This is generally a good thing for buyers, but it is worth understanding what you are getting and whether the exclusivity window is long enough for your needs.

Confidentiality: Protecting Sensitive Information

When you are looking at buying a business, the seller is going to share a lot of sensitive information with you, including financial records, customer lists, supplier relationships, and more. A confidentiality clause in the LOI, or a separate Non-Disclosure Agreement, is meant to protect that information and prevent you from using it for any other purpose if the deal does not go ahead.

Confidentiality obligations in an LOI are often intended to be binding. Breaching them could have serious consequences, depending on the facts. If you are not sure what you are agreeing to keep private, or for how long, a lawyer can help you understand your obligations before you sign.

Why You Have a Lawyer Review Your LOI

LOIs are often presented as simple, informal documents. And in some ways they are. But they set the tone for the entire deal, and the terms you agree to at this stage can be difficult to renegotiate later.

Having a lawyer review your LOI before you sign may help you spot issues you had not considered, understand what is binding and what is not, negotiate better terms from the start, and avoid surprises once the formal purchase agreement is drafted. It is a relatively small step that can make a significant difference in how the rest of the transaction unfolds.

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FREQUENTLY ASKED QUESTIONS

Q: Do I have to sign an LOI before buying a business in Ontario?

A: No, an LOI is not legally required. However, it is a common step in business acquisitions and many sellers expect one before moving forward. Whether signing one makes sense in your situation depends on the deal. A business lawyer can help you decide how to approach the early stages of your transaction.

Q: If the LOI says it is "non-binding," does that mean I can just walk away from the deal?

A: Not necessarily. Even if the main terms of the LOI are described as non-binding, certain provisions, like confidentiality, exclusivity, and deposit conditions, may still be enforceable. The specific wording of the document matters a lot. You should have a lawyer review the LOI before you sign so you understand exactly what you are and are not agreeing to.

Q: Can I negotiate the terms of an LOI?

A: In most cases, yes. An LOI is a starting point for negotiation, not a take-it-or-leave-it document. Common things buyers may want to negotiate include the length of the exclusivity period, whether the deposit is refundable during due diligence, and the scope of confidentiality obligations. A lawyer can help you identify what is worth pushing back on before you agree to anything.

Q: How is an LOI different from a purchase and sale agreement?

A: An LOI is a preliminary document that outlines the general terms of a proposed deal. It is typically not the final, binding agreement. A purchase and sale agreement, sometimes called an Asset Purchase Agreement or Share Purchase Agreement, is the formal, detailed contract that actually governs the transaction. The LOI usually comes first and helps set the stage for drafting the formal agreement.

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CONTACT

Thinking about buying a business in Ontario? Before you sign anything, it is worth speaking with a business lawyer. DevLaws works with buyers across Ontario on business acquisitions of all sizes, from reviewing early-stage LOIs to guiding you through closing. Contact DevLaws today to get started.

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DISCLAIMER

This article is provided for general information purposes only and does not constitute legal advice. It is not intended to create a lawyer-client relationship. Laws and their interpretation can change, and the information here may not reflect the most current legal developments. Every situation is different and the information in this article may not apply to your specific circumstances. If you are involved in a business transaction or have questions about a Letter of Intent, you should consult a qualified lawyer in Ontario for advice tailored to your situation. DevLaws does not guarantee any particular outcome or result.