Letter of Intent in Business Acquisitions: What Ontario Buyers and Sellers Need to Know
Every successful business acquisition begins well before a final agreement is signed. In Ontario, a Letter of Intent (LOI) is often the first formal document exchanged when buying or selling a business. It sets out the foundational terms of the transaction and signals both parties’ intent to move forward—creating a clear roadmap toward a definitive, binding agreement.
Although frequently viewed as a preliminary step or “mere formality,” a properly drafted LOI can provide essential clarity, structure, and legal protection in what is otherwise a complex and high-stakes process.
In this article, Verma Law Firm explains what a Letter of Intent is, when it can be legally binding under Ontario law, its key components, and how to ensure your LOI protects your interests—whether you are a buyer or a seller.
What Is a Letter of Intent in a Business Transaction?
A Letter of Intent in the context of a business acquisition is a preliminary legal document that outlines the principal terms agreed upon by a buyer and seller. Its purpose is to guide further negotiations and identify key deal points such as:
- Purchase price
- Deal structure (asset or share purchase)
- Due diligence timelines
- Closing conditions
At its core, an LOI answers a critical question: “Are both parties aligned before committing significant time, money, and resources?”
While an LOI is not the final agreement, it lays the groundwork upon which the definitive purchase agreement is built.Is a Letter of Intent Legally Binding in Ontario?
One of the most common questions we hear is: “Is a Letter of Intent legally binding?”
The answer depends on how the LOI is drafted and how the parties conduct themselves.
In Ontario, LOIs are typically non-binding, except for specific provisions that are intended to be legally enforceable, including:
- Confidentiality clauses
- Exclusivity (no-shop) provisions
- Governing law clauses
- Non-solicitation terms
If these provisions are clearly stated as binding, Ontario courts will generally enforce them. However, an LOI may unintentionally become binding if it uses definitive language or if the parties behave as though a final agreement has already been reached.
Key Ontario Case Law: Wallace v. Allen (2009 ONCA 36)
In Wallace v. Allen, the Ontario Court of Appeal confirmed that a document labeled as a “Letter of Intent” can still be legally binding. The Court found that language such as “it is agreed” or “shall,” combined with conduct showing reliance on the agreement, demonstrated a clear intention to be bound.
This case highlights a critical point: Courts look at substance over labels.
Essential Components of a Well-Drafted Letter of Intent
A properly prepared LOI for a business acquisition in Ontario should include the following elements:
1. Identification of the Parties
Clearly state the full legal names of the buyer and seller, along with a brief description of the business or assets involved.
2. Description of the Transaction
Specify whether the deal is an asset purchase, share purchase, or merger, and outline relevant details such as:
- Nature of the business
- Assets or shares being acquired
- Location of operations
- Intellectual property, leases, or licences
3. Purchase Price and Payment Structure
Outline the agreed-upon price, deposit terms, payment method, and any adjustments tied to due diligence or working capital.
4. Due Diligence
Define the scope and timeframe for due diligence, including access to financial statements, contracts, employee information, and regulatory records.
5. Confidentiality
A binding confidentiality clause protects sensitive business information if the transaction does not proceed.
6. Exclusivity
An exclusivity or “no-shop” clause prevents the seller from negotiating with other buyers for a defined period.
7. Conditions Precedent
List conditions that must be satisfied before entering into a final agreement, such as financing approval or regulatory clearance.
8. Binding vs. Non-Binding Provisions
Clearly distinguish which sections are legally binding and which are not.
9. Termination
Explain how and when the LOI may be terminated, including expiration dates or termination for breach.
10. Governing Law
Specify that the LOI is governed by the laws of Ontario.
Benefits of Using a Letter of Intent
A well-structured LOI offers several advantages:
- Clarity early in the process, reducing future disputes
- Cost-effective negotiations by focusing legal efforts
- A structured due diligence roadmap
- Legal protection through binding clauses
- Good-faith engagement, encouraging cooperation and transparency
Common Mistakes to Avoid
Business owners often run into trouble by:
- Using vague or inconsistent language
- Failing to specify which clauses are binding
- Treating the LOI as insignificant
- Omitting a governing law clause
- Proceeding without legal advice
Even a short document can create unintended legal obligations if not carefully drafted.
Letter of Intent vs. Final Agreement
| Letter of Intent | Final Purchase Agreement |
|---|---|
| Preliminary document | Definitive contract |
| Mostly non-binding | Fully binding |
| Early stage | After due diligence |
| Flexible | Conclusive |
Understanding this distinction ensures the LOI is used as a negotiation tool—not a substitute for a final agreement.
What Happens After an LOI Is Signed?
Once an LOI is executed, the transaction typically proceeds through:
- Due Diligence
- Drafting of a Share or Asset Purchase Agreement
- Regulatory approvals (if required)
- Closing and transfer of ownership
Do You Need a Lawyer to Draft a Letter of Intent?
While it is possible to draft an LOI without a lawyer, doing so can expose you to significant risk. A poorly drafted LOI may unintentionally bind you to a transaction or fail to protect your interests.
An experienced Ontario business lawyer ensures that your LOI:
- Accurately reflects your intentions
- Avoids unintended enforceability
- Includes essential protective clauses
- Complies with Ontario law and case precedent
Protect Your Business Transaction with Verma Law Firm
At Verma Law Firm, we provide strategic legal guidance for business acquisitions and sales at every stage. Our team assists clients with:
- Drafting and reviewing Letters of Intent
- Conducting legal due diligence
- Preparing share and asset purchase agreements
- Closing transactions efficiently and compliantly
📞 Contact Verma Law Firm today to schedule a consultation and ensure your business deal is structured for success.