What Is a Letter of Intent (LOI) in a Business Sale?
In many business sale transactions, the first formal document exchanged between a buyer and seller is not the purchase agreement, but the letter of intent. Often referred to as an “LOI,” this document marks a turning point in negotiations: the stage where preliminary discussions begin to take a structured, and in some respects, legally meaningful form.
Despite its common use in Ontario private M&A transactions, the legal effect of a letter of intent is frequently misunderstood. Parties may assume it is either fully binding or entirely informal. In reality, it occupies a more nuanced position—one that can carry significant legal and practical consequences if not carefully reviewed.
Understanding the Role of a Letter of Intent
A letter of intent is a written document that outlines the key terms of a proposed business transaction before the parties enter into a definitive agreement. It is intended to capture the principal deal points—such as price, structure, and timing—while providing a framework for moving toward a binding purchase agreement.
From a practical standpoint, the LOI serves two primary purposes. First, it ensures that both parties are aligned on the core elements of the transaction before incurring the time and expense of full legal drafting and due diligence. Second, it signals a level of seriousness and commitment, particularly in competitive sale processes.
However, while the LOI may feel preliminary, it often shapes the trajectory of the deal in lasting ways. Terms agreed upon at this stage can influence negotiations well into the later stages of the transaction.
Is a Letter of Intent Legally Binding?
One of the most important—and frequently misunderstood—questions is whether an LOI is legally binding. The answer depends on how the document is drafted.
In most Ontario transactions, a letter of intent is expressed to be largely non-binding with respect to the substantive terms of the deal, such as purchase price or transaction structure. This means that either party can generally walk away if a definitive agreement is not reached.
That said, certain provisions within the LOI are often explicitly binding. Confidentiality clauses, for example, typically require the parties to protect sensitive business information exchanged during negotiations. Exclusivity provisions—sometimes referred to as “no-shop” clauses—may prevent the seller from negotiating with other potential buyers for a defined period. In some cases, provisions relating to costs or governing law may also carry binding effect.
The distinction between binding and non-binding terms is not merely technical. It can have real consequences, particularly where one party assumes flexibility while the other relies on enforceable obligations.
Key Terms That Shape the Transaction
Although letters of intent are not meant to be exhaustive, they usually address several core aspects of the proposed transaction. These often include the purchase price or valuation range, the proposed structure of the deal (whether as a share or asset purchase), and any anticipated adjustments to price.
The LOI may also outline conditions that must be satisfied before closing, such as the completion of due diligence, securing financing, or obtaining regulatory approvals. Timelines for key milestones are often included, as well as a general description of what assets or shares are being acquired.
Importantly, even where these terms are expressed as non-binding, they tend to set expectations. Departing from them later in the process can create friction and may undermine trust between the parties.
Where Risk Commonly Arises in LOIs
Because letters of intent are often viewed as preliminary, they are sometimes approached with less scrutiny than definitive agreements. This is where risk tends to arise.
One common issue is the inclusion of vague or overly broad language, particularly around price adjustments or conditions. Ambiguity at the LOI stage can carry forward into the purchase agreement, making negotiations more difficult and increasing the likelihood of disputes.
Exclusivity provisions also warrant careful attention. While they can be a reasonable request from a buyer seeking certainty, they effectively limit the seller’s ability to explore alternative offers. If the exclusivity period is too long or not clearly defined, it can place the seller at a strategic disadvantage.
Another frequent concern is the assumption that “non-binding” means “without consequence.” Even where the core terms are not enforceable, the practical reality is that parties often feel committed once an LOI is signed. Renegotiating fundamental terms later can be challenging, both legally and commercially.
The Role of Legal Counsel at the LOI Stage
Although some parties wait until the purchase agreement stage to involve legal counsel, the letter of intent is often where key protections should first be established.
A business lawyer can assist in clarifying which provisions are binding, refining the language of critical terms, and identifying potential risks before they become embedded in the transaction. This includes ensuring that exclusivity provisions are reasonable, that confidentiality obligations are appropriately scoped, and that the structure of the deal is accurately reflected.
Early legal involvement can also streamline the later stages of the transaction. When the LOI is carefully drafted, it provides a clearer roadmap for the definitive agreement, reducing the likelihood of significant renegotiation.
FAQs:
Shira Kalfa, BA, JD, Partner and Founder
Shira Kalfa is the founding partner of Kalfa Law Firm. Shira’s practice is focused in corporate-commercial and private M&A law including corporate reorganizations, corporate restructuring, mergers and acquisitions, commercial financing, secured lending and transactional law.
© Kalfa Law 2026
The above provides information of a general nature only. This does not constitute legal or accounting advice. All transactions or circumstances vary, and specified legal advice is required to meet your particular needs. If you have a legal question you should consult with a lawyer.
