Navigating the M&A Letter of Intent Process: Everything You Need to Know

A letter of intent (LOI) in M&A is a preliminary document signed by the buyer and seller that outlines the key terms of a proposed transaction, including purchase price, deal structure, and timelines, before the definitive purchase agreement is negotiated. Most LOI terms are non-binding, but certain provisions such as confidentiality and exclusivity are legally enforceable. Getting the LOI right is one of the most consequential steps in any M&A transaction.

Whether you are buying a business or selling one, understanding how the M&A letter of intent process works, what goes in an LOI, which provisions bind you legally, how to negotiate effectively, and what comes next, is essential before you put pen to paper.

What Is a Letter of Intent in M&A?

A letter of intent (LOI), sometimes called a term sheet or memorandum of understanding (MOU), is a formal preliminary document used in mergers and acquisitions to record the principal terms of a proposed deal before a binding purchase agreement is drafted.

The LOI is typically signed after the buyer and seller have held initial discussions and agreed on a basic commercial framework, but before the intensive work of due diligence, legal drafting, and definitive contract negotiation begins.

At its core, an LOI accomplishes three things:

1. Confirms alignment on the fundamental deal terms so both parties can proceed with confidence before committing significant time and money
2. Creates a protected negotiating space through exclusivity provisions that prevent the seller from entertaining competing offers
3. Establishes a framework for the due diligence process and subsequent definitive agreement negotiations

Think of the LOI as the deal's architectural blueprint, it does not build the house, but it ensures that both parties agree on what they are building before the construction crew arrives.

Why Use a Letter of Intent?

Some parties wonder whether an LOI is strictly necessary, why not proceed directly to the definitive purchase agreement? The answer is efficiency and risk management.

Negotiating a full purchase agreement is expensive. Corporate lawyers, accountants, tax advisers, and business valuators all bill by the hour. If buyer and seller disagree on fundamental terms, price, structure, scope, late in the process, the wasted costs are substantial on both sides.

An LOI surfaces those disagreements early and cheaply. It allows parties to:

• Test alignment on price and structure without incurring full legal costs
• Protect the seller from tyre-kicker buyers who are not genuinely committed
• Protect the buyer from a seller who continues shopping the business to competitors while the buyer conducts due diligence
• Define due diligence parameters so the buyer knows what access they will have and the seller knows what information they must disclose
• Set a timeline that creates accountability and momentum for both sides

In practice, virtually every M&A transaction of any meaningful size in Canada involves an LOI. Dispensing with it saves a small amount of time upfront and creates significant risk downstream.

Where Does the M&A Letter of Intent Fit in the Process?

The LOI sits at a pivotal point in the M&A timeline, early enough to be preliminary, but late enough that both parties have formed a genuine intention to transact. Here is how the full process typically unfolds:

1. Preliminary Discussions Buyer and seller explore deal viability, share high-level financials, and conduct initial valuation discussions. A non-disclosure agreement (NDA) is usually executed first to protect sensitive information.

2. LOI Negotiation and Signing The buyer (typically) prepares an LOI setting out key commercial terms. The seller reviews, negotiates, and, once both parties are aligned, executes the document. The LOI begins the exclusivity period.

3. Due Diligence With exclusivity in place, the buyer conducts a thorough investigation of the target business, financial, legal, operational, and tax. This is when promises made during negotiations are tested against reality.

4. Definitive Purchase Agreement Based on due diligence findings, the parties negotiate the full binding contract, the Agreement of Purchase and Sale (APS). This document contains representations, warranties, indemnities, and all conditions to closing.

5. Regulatory Approvals Certain transactions require approvals from the Competition Bureau under the Competition Act (RSC, 1985, c. C-34) or sector-specific regulators. Where pre-merger notification thresholds are met, regulatory clearance must be obtained before closing.

6. Closing The purchase price is transferred, legal ownership of the shares or assets changes hands, and all required closing documentation is executed.

7. Post-Closing Integration The buyer integrates the acquired business, aligning operations, culture, systems, and workforce with the existing enterprise.

The LOI sets the tone for all of these stages. A well-drafted LOI reduces friction at every downstream step; a poorly drafted one creates it.

What Should a Letter of Intent Include?

A comprehensive LOI addresses the following core elements:

Identification of the Parties

Name the buyer and seller precisely, including any acquiring entity, holding company, or affiliate that will be the actual transacting party. Ambiguity about who is buying or selling creates unnecessary complexity later.

Transaction Structure: Share Purchase vs. Asset Purchase

This is one of the most important decisions in any M&A deal, and the LOI must specify which structure applies.

In a share purchase, the buyer acquires the corporation itself, its shares, and everything the company owns and owes. The business continues operating without interruption, and all contracts, licences, and liabilities transfer automatically.

In an asset purchase, the buyer selects specific assets to acquire (equipment, inventory, customer contracts, intellectual property) and typically avoids assuming the company's liabilities.

Buyers often prefer asset deals to contain liability exposure. Sellers often prefer share sales for tax reasons, the Lifetime Capital Gains Exemption (LCGE), for example, can shelter significant gains on the sale of qualifying small business corporation shares. The LOI should establish which structure is proposed, since this affects virtually every other aspect of the transaction.

Purchase Price and Payment Terms

State the total consideration and how it will be paid:

• Cash at closing, the most straightforward structure
• Vendor take-back (VTB) financing, the seller lends a portion of the purchase price to the buyer, repaid over time
• Earnout provisions, a portion of the purchase price is contingent on the business achieving post-closing performance targets
• Holdbacks, a portion of the price is held back for a defined period to cover potential indemnification claims

Also address whether price adjustment mechanisms apply, for example, adjustments based on final working capital levels at closing.

Due Diligence Scope and Timeline

Define the parameters of the buyer's due diligence investigation:

• What categories of information will be made available (financial records, customer contracts, employee agreements, IP registrations, regulatory filings)
• How long the buyer has to complete diligence
• What format information will be shared in (data room, in-person review, document production)
• Whether the buyer can meet with key employees or management

Sellers want to limit diligence scope to prevent overly intrusive or indefinitely extended investigations. Buyers need breadth to properly assess what they are acquiring. A well-negotiated LOI finds the right balance.

Exclusivity / No-Shop Clause

This is typically one of the most negotiated provisions in an LOI, and one of the few that is binding.

An exclusivity clause prevents the seller from soliciting, entertaining, or negotiating offers from any other potential buyer for a specified period. In Canadian M&A practice, exclusivity periods typically run 30 to 120 days, depending on deal complexity and due diligence scope.

From the buyer's perspective, exclusivity is essential, they are about to invest significant time and money in due diligence and legal fees, and they need assurance that the seller will not use that work to negotiate a better deal with a competitor.

From the seller's perspective, the length of the exclusivity period is critical. A longer period reduces the seller's negotiating leverage if the buyer tries to renegotiate price after diligence. Sellers should push for the shortest exclusivity period sufficient to allow the buyer to complete genuine due diligence.

Confidentiality

The LOI should confirm that the terms of the LOI itself and all information shared between the parties during negotiations and due diligence will be held in confidence. This may reference a separate NDA already executed, or establish confidentiality terms within the LOI itself.

Confidentiality is a binding provision, it creates enforceable legal obligations regardless of whether the transaction ultimately closes.

Conditions to Closing (High-Level)

The LOI typically identifies major closing conditions at a high level, including:

• Satisfactory completion of due diligence
• Receipt of required regulatory approvals
• Execution of key employee or management agreements
• Receipt of required third-party consents (e.g., landlord approval for lease assignment, counterparty consent for contract assignment)
• Financing condition (if the buyer is acquiring third-party financing)

The definitive purchase agreement will contain detailed conditions, but flagging them in the LOI prevents surprises.

Break Fees and Termination Rights

Address what happens if either party walks away from the transaction:

• Under what circumstances can either party terminate?
• Is a break fee payable? By whom and in what amount?
• What obligations survive termination (confidentiality, expense reimbursement)?

Binding vs. Non-Binding Designation

This is the most legally significant element of LOI drafting, addressed in detail in the next section.

Governing Law and Dispute Resolution

Specify that Ontario law governs the LOI and identify the preferred dispute resolution mechanism, litigation in Ontario courts or arbitration.

Validity Period

State how long the offer remains open for acceptance. This is typically 72 hours to two weeks, or conditional on a specified event.

Binding vs. Non-Binding Provisions: The Critical Distinction

Most LOI provisions are expressly non-binding, they record a preliminary understanding that the parties intend to formalise in a definitive agreement. However, certain provisions are binding, and Canadian courts will hold parties to them regardless of whether the transaction closes.

Typically Non-Binding

• Purchase price and payment terms
• Deal structure (share vs. asset purchase)
• Closing date and timeline
• Most conditions to closing
• Representations about the business

These provisions remain flexible throughout due diligence and definitive agreement negotiations, allowing either party to adjust their position as more information comes to light.

Typically Binding

• Exclusivity / no-shop clause, enforceable for the stated period
• Confidentiality obligations, enforceable regardless of outcome
• Expense allocation, who bears what costs if the deal does not proceed
• Governing law and dispute resolution, enforceable as written

The Ontario Court Dimension

The non-binding nature of an LOI is not self-executing. Canadian courts examine the substance of the agreement, not just its title or the parties' stated intentions, when determining whether obligations are legally enforceable.

An LOI that uses mandatory language throughout, such as "the parties shall," "it is agreed that," or "this agreement provides," can create binding obligations even if the document is labelled "non-binding." Ontario courts have found LOIs to be enforceable contracts where the parties' conduct during negotiations confirms that they intended to be bound.

Safe drafting language for non-binding provisions:

• "The parties intend to..."
• "It is proposed that..."
• "This non-binding proposal provides..."
• "Subject to execution of a definitive agreement..."

Best practice: Include an express provision in the LOI that specifically identifies which provisions are binding and which are not, for example: "Other than the Exclusivity, Confidentiality, Expense Allocation, and Governing Law sections, which are legally binding, no other provision of this letter creates a legally binding obligation on either party."

Do not rely on a blanket statement that the entire document is non-binding if you intend certain provisions to be enforceable.

What Happens After You Sign the M&A Letter of Intent?

Signing the LOI is the beginning of the intensive phase of the M&A process, not the end. Here is what follows:

1. Due Diligence

Due diligence is the buyer's opportunity to verify everything the seller has represented about the business. A thorough due diligence process examines:

• Financial records: Income statements, balance sheets, cash flow statements, tax filings, and any adjustments needed for normalised EBITDA
• Legal compliance: Regulatory adherence at the municipal, provincial, and federal level; litigation history; outstanding claims
• Operational review: Business efficiency, supplier and customer concentration risk, key contracts
• Human resources: Employment agreements, key employee retention risk, benefit obligations, and any employment standards exposure
• Intellectual property: Ownership, registration status, and any third-party licences
• Real estate: Lease terms, assignment provisions, and any environmental issues

Due diligence findings can lead to price adjustments, additional representations and warranties, or in serious cases, a buyer walking away from the transaction.

2. Negotiate the Definitive Purchase Agreement

With due diligence complete, the parties negotiate the full binding contract. The APS will include:

• Final purchase price (adjusted for any due diligence findings)
• Representations and warranties by the seller (and sometimes the buyer)
• Indemnification provisions protecting the buyer against post-closing claims
• Post-closing covenants, including non-competition and non-solicitation obligations on the seller
• Closing conditions in full detail

3. Secure Financing

If the buyer is not paying all-cash from existing resources, they must arrange financing during the exclusivity period. Lenders will want to review the LOI, due diligence materials, and business projections before committing capital.

4. Obtain Regulatory Approvals

Transactions that meet the pre-merger notification thresholds under the Competition Act must be reported to and cleared by the Competition Bureau before closing. Industry-specific sectors, financial services, telecommunications, broadcasting, transportation, may have their own regulatory requirements. Regulatory review timelines must be factored into the overall deal schedule.

5. Close the Transaction

At closing, the purchase price is transferred, legal title to the shares or assets passes to the buyer, and all required documentation (share certificates, bill of sale, officer's certificates, legal opinions) is executed and delivered.

6. Post-Closing Integration

The work of combining the acquired business with the buyer's existing operations begins immediately after closing. Successful integration requires thoughtful management of corporate culture, workforce transitions, system integration, and customer relationships.

Negotiation Tips for Buyers and Sellers

For Both Parties

Negotiate the LOI carefully, both buyers and sellers have the most leverage during LOI negotiations, before significant costs have been committed by either side. Once the LOI is signed and exclusivity is running, the dynamics shift.

Engage M&A counsel before signing, not after. An experienced corporate-commercial lawyer will identify provisions that could inadvertently create binding obligations, flag missing terms that will create problems downstream, and ensure your interests are protected throughout.

Use precise language. Vague terms, "approximately," "around," "subject to adjustment", invite disputes. Be specific about the purchase price, the exclusivity period, the diligence scope, and the closing timeline.

For Buyers

• Push for a due diligence scope broad enough to surface genuine issues, access to financials, key contracts, employment records, IP, and regulatory filings
• Include a material adverse change (MAC) condition as a high-level closing condition so you have an exit if something fundamental about the business changes before closing
• Secure financing commitment letters during the exclusivity period, not after
• Keep purchase price non-binding explicitly, with reference to potential adjustments pending due diligence

For Sellers

• Limit the exclusivity period to the minimum required for genuine due diligence, typically 45–60 days for straightforward deals
• Negotiate a break fee payable by the buyer if they terminate without cause after completing due diligence
• Define the diligence scope carefully to prevent indefinitely extended or overly intrusive investigations
• Review confidentiality terms with counsel to ensure trade secrets, customer lists, and proprietary information are adequately protected

Common Mistakes to Avoid

Using binding language throughout. Words like "shall," "agree," and "this agreement" signal enforceable obligations. Reserve them for provisions you intend to bind.

Signing without legal counsel. An LOI from a sophisticated buyer or their counsel has been carefully drafted to protect the buyer's interests. Signing it without independent legal review is a significant risk for any seller.

Omitting critical provisions. Exclusivity, confidentiality, and expense allocation should be addressed in every LOI. Leaving them out does not mean they do not apply, it means the parties have no clarity about their obligations.

Vague pricing. Purchase price should be stated with enough precision to serve as a meaningful anchor for definitive agreement negotiations.

Making the entire LOI binding. This is an equally significant mistake in the other direction, it removes the flexibility needed during due diligence and can create liability for the buyer if they cannot close on the initially proposed terms.

LOI vs. Other Preliminary M&A Documents

Buyers and sellers sometimes encounter related documents that serve similar or overlapping purposes. Here is how they compare:

In Canadian M&A practice, "LOI" and "term sheet" are often used interchangeably, though LOIs tend to be more detailed. The legal consequences of either document depend not on its label, but on its language and the conduct of the parties.

Frequently Asked Questions About the M&A Letter of Intent Process

Is a letter of intent legally binding in Canada?

A letter of intent in Canada is partly binding. Core commercial terms, purchase price, deal structure, timelines, are typically non-binding and subject to further negotiation. Specific provisions such as exclusivity, confidentiality, and expense allocation are binding and enforceable even if the transaction does not proceed. Canadian courts examine actual language and conduct, not just the document's label.

Can you back out of a letter of intent in Ontario?

You can exit a non-binding LOI without legal consequences for non-binding provisions, but you remain bound by whichever provisions were expressed as binding, most commonly exclusivity, confidentiality, and expense allocation. Exiting during an exclusivity period without cause may expose you to break fees or damages if the LOI provides for them.

What is a no-shop clause in an LOI?

A no-shop clause is a binding provision preventing the seller from soliciting or negotiating offers from other buyers for a defined period. It protects the buyer's investment in due diligence and legal work. In Canadian M&A practice, exclusivity periods typically run 30 to 120 days depending on deal complexity.

What is the difference between a letter of intent and a purchase agreement?

A letter of intent is a preliminary, largely non-binding document outlining key M&A deal terms. A definitive purchase agreement (APS) is the final, fully binding contract governing the transaction in comprehensive detail, including representations and warranties, indemnification obligations, and closing conditions. The LOI precedes and informs the APS.

What happens if due diligence reveals problems after the LOI is signed?

Material due diligence findings typically give the buyer grounds to renegotiate the purchase price, require additional representations or indemnities, or exit on the basis of unsatisfied closing conditions. The LOI's due diligence scope and conditions-to-closing provisions determine what rights the buyer has in this scenario.

How long is a letter of intent valid in Canada?

An LOI is valid for the period stated in the document, typically 72 hours to two weeks for initial acceptance. The exclusivity period separately runs 30 to 120 days from execution. Both timelines should be expressly stated in the LOI.

Should the buyer or the seller prepare the letter of intent?

In most M&A transactions, the buyer prepares the initial LOI. This gives the buyer an advantage in framing terms and establishing the negotiating baseline. Sellers should review any LOI with independent legal counsel before signing, since the terms established in the LOI shape every subsequent negotiation.

Do you need a lawyer for an M&A letter of intent?

Yes. LOIs are deceptively complex, language choices have real legal consequences Ontario courts will enforce. An M&A lawyer ensures binding provisions are clearly identified, non-binding provisions remain flexible, and your negotiating position is protected. Both buyers and sellers benefit from independent counsel before signing.

Sources & Official Resources

Federal Statutes Cited

1. Competition Act (RSC, 1985, c. C-34), Pre-merger notification requirements for M&A transactions in Canada

Federal Government Resources

2. Competition Bureau, Overview of the Merger Review Process
3. CRA, Capital Gains 2025 (T4037)

Contact Hadri Law

Whether you are buying or selling a business in Ontario, navigating the M&A letter of intent process is where deals are made, or lost. A well-negotiated LOI sets the foundation for a smoother due diligence process, a more efficient purchase agreement negotiation, and a successful closing.

The lawyers at Hadri Law advise both buyers and sellers through every stage of M&A transactions, from initial strategy through to closing. Our team includes M&A specialists with experience in share and asset deals across a broad range of industries, with particular depth in middle-market and cross-border transactions.

We offer a free initial consultation and serve clients in English, French, Spanish, and Catalan.

Call us at (437) 974-2374 or book a free consultation online.

This article is for general informational purposes only and does not constitute legal advice. Every transaction is unique, contact Hadri Law to discuss your specific situation.