A letter of intent to purchase business is a pre-contract document a buyer uses to outline the proposed price, structure, and timeline for acquiring a target company in Ontario. Most provisions are non-binding, but exclusivity, confidentiality, deposit, and governing law clauses are typically binding and enforceable.
If you are buying a business in Ontario, the letter of intent is where the deal economics get fixed and where you secure the runway to spend real money on due diligence and legal work. Sellers see the same document differently, and Hadri Law has already written about the seller-side view in our M&A Letter of Intent Process post. This guide is for the other side of the table: the buyer.
We walk through what a strong buyer-side letter of intent for business acquisitions should include, which provisions are binding under Ontario law, how to structure exclusivity and deposit, how purchase price mechanics work in practice, and what conditions belong on the path to a definitive agreement. The acronym "LOI" (sometimes searched as "loi letter of intent") is used interchangeably with "term sheet" and "heads of agreement" in Canadian M&A; the legal effect depends on the drafting, not the label.
Why a Buyer Sends a Letter of Intent to Purchase Business Before a Definitive Agreement
A buyer's letter of intent does four things at once. It anchors price and deal structure before either side commits substantial legal spend. It triggers an exclusivity period so the buyer can fund due diligence without the seller running a parallel auction. It signals the buyer's seriousness to lenders and equity backers. And it creates a shared written framework that legitimate sellers respect under the duty of good faith in contractual performance recognised by the Supreme Court of Canada in Bhasin v. Hrynew, 2014 SCC 71.
Timelines vary, but a typical Ontario mid-market deal moves from signed LOI to executed definitive agreement in 60 to 120 days. Skipping the LOI step is possible on small, simple transactions, but on anything where due diligence will cost the buyer real money it is the wrong economy.
Binding vs Non-Binding: The Distinction That Drives Everything
The first question every Ontario court asks when an LOI ends up in litigation is whether the parties intended a binding contract. The answer turns on the document's language, the parties' conduct, and the surrounding context, assessed objectively. Labelling a document "non-binding" is helpful but not decisive.
In Wallace v. Allen, 2009 ONCA 36, the Ontario Court of Appeal upheld a finding that a letter of intent for the sale of a business was binding, in part because the parties had begun acting as though it was, including a public announcement and operational handover. The lesson for buyers: a sloppy LOI plus a few weeks of consistent conduct can produce a contract you did not intend to sign.
The drafting fix is straightforward. Include an explicit "Non-Binding Effect" clause that lists which provisions are binding and states that the remainder is a non-binding expression of present intentions. The provisions typically made binding are:
- Exclusivity / no-shop
- Confidentiality (often nested with a stand-alone NDA signed earlier)
- Deposit handling
- Allocation of expenses
- Governing law (Ontario) and forum
- Dispute resolution
- Public announcements
Everything else, price, structure, conditions, representations, warranties, indemnities, stays non-binding until the definitive purchase agreement is signed.
Deal Structure: Asset Purchase or Share Purchase
The LOI must state whether the buyer is acquiring assets or shares, because the two structures generate fundamentally different tax, liability, and consent profiles. Changing structure later usually restarts negotiation.
Buyers generally prefer asset purchases. The buyer cherry-picks the assets it wants, leaves behind unknown and undisclosed liabilities (subject to a few statutory carve-outs), and refreshes the undepreciated capital cost of depreciable property for capital cost allowance (CCA) purposes. Asset deals also let the buyer step around problem contracts that lack assignability. The Ontario Bulk Sales Act was repealed in 2017 by the Burden Reduction Act, 2017, so buyers no longer need a bulk sales waiver, but specific clearances may still be relevant in particular contexts.
Sellers generally prefer share purchases. A share sale produces capital gains rather than ordinary income, and for an eligible vendor the lifetime capital gains exemption (LCGE) under the Income Tax Act can shelter a substantial portion of the gain on qualified small business corporation (QSBC) shares. The LCGE has several tests (gross assets composition, holding period, active business), and eligibility should be confirmed with tax counsel before the LOI commits to a structure that turns on it.
Two tax elections worth flagging in any asset-sale LOI:
- The joint election under section 167 of the Excise Tax Act allows the parties to treat the sale of a "business or part of a business" as a supply made for nil consideration for GST/HST purposes, eliminating the need to charge and remit HST on closing, provided the buyer acquires ownership, possession, or use of all or substantially all of the property necessary to carry on the business. The election is made on CRA Form GST44 and filed by the purchaser.
- The joint election under section 22 of the Income Tax Act allows the buyer to deduct losses on acquired accounts receivable and treats the seller's loss as ordinary income rather than a capital loss. The election is made on CRA Form T2022.
Both elections require seller cooperation, so they belong in the LOI as agreed framework items.
Purchase Price Mechanics in a Letter of Intent to Buy a Business
A clear price clause is the most heavily negotiated paragraph in any letter of intent to buy a business. Common structures:
Fixed price on cash-free, debt-free basis. The buyer pays a stated amount, the seller takes the cash and pays off the debt at closing. Simple, but it requires a clear definition of what counts as "debt" and "debt-like items" (typically including unpaid taxes, deferred revenue, capital lease obligations, severance accruals, and unfunded pension liabilities).
Locked-box. The price is fixed by reference to a historical balance sheet, with no post-closing adjustment. The buyer takes the economic risk and reward of the business from the locked-box date forward. Common in European deals, less common in Canada but growing.
Completion accounts with working capital adjustment. The price is adjusted at or shortly after closing against a target level of working capital, typically set as the 12-month trailing average. The mechanics are straightforward in theory and brutal in practice: working capital disputes are the single largest source of post-closing M&A litigation.
Earn-out. A portion of the price is contingent on post-closing financial performance, typically 1 to 3 years of EBITDA or revenue. Earn-outs bridge valuation gaps but routinely produce disputes about post-closing accounting and operating decisions. If the LOI proposes an earn-out, the buyer should at least signal the metric, the period, and whether the seller will have operating influence during the earn-out window.
Holdback or escrow. A typical Ontario holdback is 10 to 20 percent of the purchase price for 12 to 24 months, held against indemnity claims for breach of representations and warranties. Some deals replace the holdback with representation and warranty insurance (R&W insurance), which has become more common in larger Canadian transactions.
The LOI should state the price, the structure, the assumed working capital target (or the method for setting it), and any deposit or holdback amount. Vague price language is one of the most reliable sources of failed deals.
Exclusivity and No-Shop
Exclusivity is the single most valuable thing a buyer extracts from a letter of intent. Without it, the seller can run a parallel auction, and every dollar the buyer spends on lawyers and accountants is at risk of being used to extract a higher offer from someone else.
A typical exclusivity period for an Ontario mid-market deal is 30 to 90 days. The no-shop language should prohibit the seller (and its directors, officers, employees, and advisors) from soliciting, encouraging, entertaining, negotiating, or accepting offers from anyone else during the period. A "notification" clause requiring the seller to disclose any inbound approaches is a useful add. Carve-outs are minimal in private-company deals; public-company "fiduciary outs" do not translate to private M&A.
Remedies for breach matter. Specific performance is rarely granted on a non-binding LOI, but a liquidated damages or expense reimbursement clause can give the buyer a meaningful financial backstop. If the seller breaches and the deal dies, the buyer wants at least its legal and accounting fees covered, and ideally a break fee on top.
Deposit and Earnest Money
Not every Ontario LOI involves a deposit, but deposits are increasingly common where the buyer is asking for a long exclusivity period or where the seller has competing bidders. Typical amounts in Ontario are smaller than in comparable US deals, often in the range of 1 to 5 percent of the purchase price.
The structure questions are: refundable or non-refundable, who holds the funds (usually counsel for one side in trust), and what triggers forfeiture. Forfeiture should be tied to specific events (buyer walks away without cause, buyer fails to fund) rather than open-ended dissatisfaction with diligence findings. A deposit that is non-refundable in all circumstances tilts the balance back to the seller and should be resisted by buyers.
Due Diligence Access and Confidentiality
The LOI grants the buyer access to information it needs to confirm price and structure. Typical scope: financial statements (audited where available, plus management accounts), tax filings, material contracts, customer and supplier lists, employee data, intellectual property registrations, real property leases and titles, litigation files, and corporate records (minute books, share registers, articles).
Confidentiality is almost always binding. A standalone non-disclosure agreement is usually signed before the LOI, and the LOI cross-refers to it or repeats its key terms. Confidentiality obligations typically survive termination for 2 to 3 years. Where the buyer is a competitor, "clean team" arrangements limit access to commercially sensitive data (pricing, customer-specific margins) to a small ring-fenced group on the buyer side, often outside counsel and an independent consultant.
Conditions to Definitive Agreement
Conditions are not commitments, they are the buyer's escape ramps if something material goes wrong between LOI and closing. The LOI should list the conditions plainly so the seller is not surprised when the long-form agreement arrives.
Satisfactory due diligence. The standard buyer condition. Some sellers push back and ask for an objective standard ("findings that materially adversely affect the business"); buyers should resist, since due diligence often turns up issues that are subjectively dealbreaking but objectively arguable.
Buyer approvals. Board approval, shareholder approval if required, lender consent on the buyer's existing facilities.
Financing. If the buyer is using third-party debt or equity, the LOI should say so. A financing condition is essential where financing is uncertain; sellers will push for a "highly confident" letter from the lender or removal of the condition entirely.
Regulatory clearance. Two federal regimes commonly come into play. Part IX of the Competition Act requires pre-merger notification where transaction-size and party-size thresholds are exceeded; the Competition Bureau publishes the transaction-size threshold each year (it remains C$93 million for 2026). The Investment Canada Act requires net benefit or national security review where a non-Canadian acquires control of a Canadian business above specified thresholds (which differ for WTO investors, state-owned enterprises, and cultural businesses). Industry-specific approvals (telecommunications, broadcasting, financial services, transportation) may also apply.
Third-party consents. Almost every business has change-of-control or assignment clauses in key contracts (customer master agreements, supply agreements, leases). The LOI should signal that material consents will be a condition; the asset versus share structure decision is partly a function of how many consents are realistically obtainable.
Employment matters. Under section 9 of the Employment Standards Act, 2000, where a purchaser hires an employee of the seller within 13 weeks, the employee's service with the seller is deemed continuous with the purchaser for ESA purposes (notice, severance, vacation, leaves). Asset purchasers should plan how to handle the workforce, decide which employees to offer continued employment, and identify which key personnel need retention agreements signed at closing.
Termination Provisions
Even a good LOI needs an end date. Standard termination triggers include failure to execute a definitive agreement by a long-stop date (typical: 60 to 120 days from LOI), mutual agreement to terminate, and material breach of a binding provision. The clause should specify which provisions survive termination, confidentiality, expenses, governing law, dispute resolution, and the return or destruction of due diligence materials.
Material adverse change (MAC) is usually deferred to the definitive agreement, but a buyer may want to flag in the LOI that a MAC clause will be negotiated. The current Canadian MAC standard is high: a long-duration, material decline in business that is not industry-wide. Buyers should not assume a MAC clause will let them walk on an ordinary downturn.
Why a Letter of Intent Template Business Purchase Document Is Not Enough
Generic letter of intent template business purchase documents pulled from the internet typically fall short in three ways. They do not address Ontario-specific tax elections (section 167 GST/HST, section 22 receivables). They use US-style fiduciary out and break fee language that does not match Canadian private-company practice. And they rarely calibrate exclusivity, deposit, and conditions to the actual deal size and risk profile. Treat any template as a starting point for negotiation, never as a substitute for legal review.
Frequently Asked Questions
Is a letter of intent to purchase a business legally binding in Ontario?
It depends on the drafting and the parties' conduct. Most LOIs are intentionally split: a few provisions (exclusivity, confidentiality, deposit, governing law) are binding, and the rest are non-binding. The Ontario Court of Appeal in Wallace v. Allen, 2009 ONCA 36, confirmed that LOIs can be binding where the language and conduct so indicate. An explicit "Non-Binding Effect" clause is essential.
Who pays for the legal costs of negotiating an LOI?
Each side normally bears its own costs, and the LOI says so. If the deal dies because the seller breaches exclusivity, a well-drafted LOI may give the buyer an expense reimbursement remedy. Some larger Ontario deals also include a break fee, payable if a specified terminating event occurs.
How long should an LOI exclusivity period be?
Typical Ontario mid-market exclusivity is 30 to 90 days. The length should match the realistic time the buyer needs to complete due diligence and negotiate the definitive agreement. Asking for too long signals weakness; asking for too short leaves the buyer exposed to a parallel auction during the work.
What happens to a deposit if the deal does not close?
It depends on the LOI. Refundable deposits return to the buyer on termination unless the buyer walked away without cause. Non-refundable or partially non-refundable deposits are forfeited on the triggers specified in the document. Vague forfeiture clauses cause litigation; buyers should insist on precise triggers tied to the buyer's conduct, not the seller's dissatisfaction.
Sources & Official Resources
Ontario Statutes Cited
- Business Corporations Act (Ontario), RSO 1990, c B.16
- Employment Standards Act, 2000, s. 9, Continuity of Employment
- Burden Reduction Act, 2017 (repealed Ontario Bulk Sales Act)
Federal Statutes Cited 4. Canada Business Corporations Act, RSC 1985, c C-44 5. Competition Act, RSC 1985, c C-34, Part IX (Notifiable Transactions) 6. Investment Canada Act, RSC 1985, c 28 (1st Supp) 7. Excise Tax Act, s. 167, Sale of a Business Election 8. Income Tax Act, s. 22, Sale of Accounts Receivable
CRA Forms and Guidance 9. CRA Form GST44, Election Concerning the Acquisition of a Business or Part of a Business 10. CRA Form T2022, Election in Respect of the Sale of Debts Receivable
Competition Bureau Guidance 11. Competition Bureau, 2026 Pre-Merger Notification Transaction-Size Threshold ($93M)
Case Law 12. Wallace v. Allen, 2009 ONCA 36 (Binding Letter of Intent) 13. Bhasin v. Hrynew, 2014 SCC 71 (Good Faith in Contractual Performance)
Contact Hadri Law
A letter of intent to purchase a business is short, fast to draft, and disproportionately important to how the deal turns out. The wrong exclusivity period, the wrong deposit structure, or a sloppy binding-effect clause can hand a seller leverage that lasts through closing. Buyers who get the LOI right preserve their negotiating position for the parts of the deal that matter: price adjustments, indemnity caps, working capital targets, and conditions to closing.
Hadri Law's M&A team advises Ontario buyers on letters of intent and definitive purchase agreements for asset and share transactions. Our founder Nassira El Hadri (Law Society of Ontario, 2021) and corporate lawyer Nicholas Dempsey (Law Society of Ontario, 2018; 90+ asset and share sale transactions) lead the practice, supported by tax counsel Martina Caunedo on purchase price allocation, section 167 elections, and post-closing tax planning.
We offer a free initial consultation and serve clients in English, French, Spanish, and Catalan.
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This article is for general information only and does not constitute legal advice. Reading or relying on it does not create a solicitor-client relationship with Hadri Law Professional Corporation.
