Every successful business acquisition begins long before a final agreement is signed. In Ontario, a Letter of Intent (LOI) is often the first formal document exchanged in the process of buying or selling a business. It outlines the foundational terms and shows both parties’ commitment to move forward- creating a roadmap toward a binding contract. While often perceived as “just a formality,” an LOI, when drafted properly, offers substantial clarity, legal protection, and structure to what can otherwise be a complex transaction.
In this article, we break down what a Letter of Intent is, its components, its enforceability under Ontario law, and how to ensure your LOI serves your interests effectively. Whether you’re a buyer or seller, understanding this crucial legal document can make or break your deal.
What is a Letter of Intent in Business?
A Letter of Intent for the acquisition of a business is an unbiased legal note that outlines the agreed-upon initial terms between a buyer and seller in a proposed business deal. It serves as a road map to continue negotiating and brings into focus key terms like the price for purchase, structure of the deal, due diligence, and closing terms.
In essence, an LOI answers the question: “Are we on the same page before committing resources to full legal documentation?” It is not the final contract, but it lays the necessary groundwork for one.
Is a Letter of Intent Legally Binding?
A common question business owners ask is: “Is a Letter of Intent binding?” The answer depends on both the wording of the LOI and the conduct of the parties involved.
In Ontario, LOIs are generally non-binding, except for certain provisions like:
- Confidentiality clauses
- Exclusivity agreements
- Governing law clauses
- Non-solicitation provisions
These are considered binding if clearly expressed. Importantly, an LOI may inadvertently become enforceable if it uses definitive language or if parties behave as if they are already bound by the deal.
Case Law: Wallace v. Allen (2009 ONCA 36)
In this pivotal case, the Ontario Court of Appeal held that a letter of intent can be considered binding if it uses language like “it is agreed” or “shall,” and if parties act in reliance on its terms. In Wallace, the court found that the parties had reached a binding agreement despite labeling it an “LOI,” because of the certainty of terms and conduct suggesting intent to be bound.
Key Components of an Letter Of Intent
A well-drafted Letter of Intent for buying a business in Ontario should contain the following elements:
- Introduction and Identification of Parties
State the full legal names of the buyer and seller and provide a brief description of the business or assets being discussed.
- Description of the Transaction
Clearly indicate whether the transaction involves an asset purchase, share purchase, or merger, including details like:
- Nature of the business
- Assets or shares being acquired
- Business location
- Intellectual property, leases, or licenses involved
Example: If a buyer intends to purchase the assets of a bakery in Toronto, the LOI should list key assets like ovens, real estate lease, customer lists, and trademarks.
- Purchase Price and Payment Terms
Outline the agreed-upon price, deposit structure, method of payment, and any conditions tied to the price (e.g., adjustments based on due diligence or working capital levels).
Example: “The Buyer agrees to pay CAD 750,000 in total consideration, with CAD 100,000 payable as a refundable deposit subject to due diligence.”
- Due Diligence
Define the timeframe in which the buyer will do due diligence. Describe what records will be available (financials, contracts, employee information, etc.).
- Confidentiality Clause
A mutual obligation to keep transaction information confidential. This is crucial in order to preserve goodwill and business stability in case the transaction collapses.
- Exclusivity Clause
Grants the buyer exclusive rights to negotiate for a fixed period, during which the seller cannot solicit or entertain other offers.
Example: “The Seller shall not solicit, initiate, or entertain other offers for the business for a period of 45 days from the date of this LOI.
- Conditions Precedent
Identify conditions that must be satisfied before entering a final agreement- e.g., financing approval, regulatory clearance, or satisfactory due diligence.
- Binding vs Non-Binding Language
Clearly state which parts are legally binding (e.g., confidentiality, exclusivity) and which are not (e.g., pricing and transaction terms).
- Termination Clause
Specify how the LOI can be revoked or terminated and under what conditions (e.g., breach, lapse of time, or mutual agreement).
- Governing Law
Mention that the LOI is governed by the laws of Ontario.
Benefits of Using a Letter of Intent
Using a Letter of Intent for business purchase in Ontario offers the following advantages:
- Clearness and Guidance
An LOI establishes the key deal terms at an early stage, minimizing the likelihood of disagreements at final negotiations.
- Cost-Effective Negotiation
By clearly outlining areas of agreement and disagreement, LOIs make the negotiation process more efficient and concentrate legal drafting efforts.
- Due Diligence Roadmap
A comprehensive LOI guides the flow of documents and financial information during due diligence, which might be time-critical.
- Legal Protection
Binding clauses are protective of both parties. For instance, a confidentiality clause does not allow a buyer to disclose trade secrets if the transaction fails.
- Good Faith Engagement
An LOI creates confidence and shows commitment, so the other party will be more ready to provide sensitive information or give concessions.
Step-by-Step Guide to Preparing an LOI
The following is the process of composing a letter of intent that’s legally compliant and commercially successful:
Step 1: Engage an Ontario Business Lawyer
Acquiring a business is a legal minefield. Legal advice mitigates enforceability risks and secures the paper expresses your will.
Step 2: State Transaction Goals
Explicitly outline if this is an asset purchase or share buy, and pin down high-priority deal conditions.
Step 3: Negotiate and Finalize Key Conditions
Put in crucial clauses- price, timeframes, contingencies, and confidentiality terms.
Step 4: Define Binding Provisions
Clearly indicate where the sections of the LOI are meant to be legally binding.
Step 5: Check and Finalize
Both sides must go over the draft, edit where possible, and verify mutual understanding.
Step 6: Sign the Letter of Intent
Signing the LOI signifies the start of extensive due diligence and additional negotiation. Always hold a fully executed copy.
Common Mistakes to Avoid
Drafting an LOI may appear straightforward, but many businesses make errors that lead to disputes or unintended obligations:
- Using Ambiguous Language
Avoid vague terms like “intends to” or “may.” These can cause confusion about intent or legal effect.
- Forgetting to Include Binding Clauses
A missing confidentiality or exclusivity clause can leave you exposed if the deal falls through.
- Treating the LOI as Just a Formality
Courts can enforce an LOI if they determine it reflects a meeting of the minds (Wallace v. Allen).
- Not Specifying Governing Law
If the LOI doesn’t specify Ontario law, conflict of law issues may arise in a dispute.
- Proceeding Without Legal Advice
What looks like a simple letter can impose complex legal obligations. Use a legal professional to ensure your rights are protected.
LOI vs. Final Contract: Understanding the Difference
While both are used in business transactions, their purposes differ significantly:
Criteria Letter of Intent Contract
- Purpose Outlines preliminary terms Formalizes the full transaction
- Binding Nature Mostly non-binding (except select clauses) Fully enforceable
- Timing Early stage of transaction Final stage after due diligence
- Flexibility Allows room for negotiation Sets out conclusive terms
Understanding this distinction helps parties use the LOI effectively as a negotiation tool, not a contract substitute.
What Happens After an LOI is Signed?
Signing a Letter of Intent kicks off a multi-stage process:
- Due Diligence: Review of financials, contracts, tax obligations, employee liabilities, and legal compliance.
- Drafting the Final Agreement: Based on due diligence findings, the parties draft and negotiate a Share Purchase Agreement (SPA) or Asset Purchase Agreement (APA).
- Regulatory Approvals: If required, the deal may need approval from regulatory bodies like the Competition Bureau or securities regulators.
- Closing: The parties execute the final contract, complete payment, and transfer ownership.
Can You Cancel a Letter of Intent?
Yes, LOIs can be terminated in the following scenarios:
- Mutual Agreement – Both parties agree to withdraw.
- Expiration Clause – The LOI expires after a fixed term if no progress is made.
- Breach – One party breaches a binding clause, giving the other a right to terminate.
Do You Need a Lawyer to Draft a Letter of Intent?
Technically, you can draft an LOI without a lawyer. But should you? Absolutely not.
A poorly worded LOI can expose you to risks you didn’t intend- such as accidentally binding yourself to buy a business you later discover has financial issues. Lawyers ensure the document:
- Accurately reflects your intentions
- Avoids binding obligations unless desired
- Includes all relevant protective clauses
- Aligns with Ontario’s legal standards and case law
Secure Your Business Deal with Pacific Legal
At Pacific Legal, we provide you with customized legal services to enable you to craft a detailed Letter of Intent that protects your interests and lays the foundation for a successful business acquisition. Our qualified Ontario business attorneys will assist you in navigating:
- Preparing enforceable LOIs
- Legal due diligence
- Share and asset purchase agreements
- Closing and compliance
📞Book a consultation today and take the first step toward securing your business future.
