What is a Letter of Intent and Is It Binding?

If you are buying or selling a business, the letter of intent (LOI) is the first document that matters. It sets out the key commercial terms of the proposed transaction before either party commits to the time and expense of drafting a full purchase agreement. Most business owners treat the LOI as a preliminary document; something to get through quickly on the way to the "real" deal. That is a massive mistake. Getting the LOI right matters more than most people realize. Failure to put a quality LOI in place is almost certain to cost you significantly more money, and potentially the deal itself.

What is a Letter of Intent?

A letter of intent is a document signed by the buyer and seller that records the agreed commercial terms of a proposed transaction. It typically covers the purchase price, the structure of the deal (share purchase or asset purchase), the payment terms, any conditions that need to be satisfied before closing, and the proposed timeline.

The LOI is not the purchase agreement. It does not document every term of the transaction in detail. Its purpose is to confirm that the parties have reached agreement on the key commercial points before either side invests significant time and money in due diligence and legal drafting.

Is the LOI Binding?

This is the question we hear most often, and the answer is: it depends on the clause.

Most LOIs are structured as partially binding documents. The main commercial terms (purchase price, structure, payment terms) are typically expressed as non-binding; they record the parties' current intentions but do not legally obligate either side to complete the transaction on those terms. Even though they are not binding, the LOI is referred to throughout the definitive agreement drafting process to ensure that the terms going into the final agreements match the terms the parties agreed to. This is your lawyer’s best defence to argue that something is a “settled term”, and helps avoid endless negotiation of language in the definitive agreements. LOI clarity means significantly reduced expenses to the parties.

Certain provisions in a well-drafted LOI are binding, and intentionally so. The “binding provision” language is often overlooked by the layperson, but a lawyer spends a lot of time determining which terms should survive termination of the LOI. The most common binding provisions are:

1. Exclusivity. The seller agrees not to solicit or entertain offers from other potential buyers for a defined period, typically 30 to 90 days, while the buyer completes due diligence.

2. Confidentiality. Both parties agree to keep the existence and terms of the transaction confidential.

3. Costs. Each party is responsible for its own costs if the deal does not proceed.

4. Non-Competition and/or Non-Solicitation. Often, sellers are letting buyers see who their clients are. This creates risk that the buyer could simply try to enter the market and steal the seller’s employees or clients.

5. IP Protections. Until the business is sold, the sellers should continue to own the IP. The buyer is going to learn about some of this IP during the due diligence process, and it is essential that they are prevented from using this knowledge to the detriment of the sellers.

6. Governing law. The LOI specifies which jurisdiction's laws govern the document.

These provisions are binding from the moment the LOI is signed, regardless of whether the transaction ultimately closes. Pay close attention to the binding terms, because they could include covenants or liabilities that you didn’t think would survive termination of the LOI.

Why the LOI Matters More Than Most People Think

The LOI sets the commercial framework that the definitive agreement will be drafted around. In practice, it is very difficult to renegotiate the key commercial terms after the LOI is signed. Once a buyer and seller have agreed on a purchase price and deal structure in an LOI, walking back those terms later in the process is seen as bad faith and often kills deals. As mentioned above, the lawyers rely on the LOI to avoid having to negotiate settled deal terms. LOIs that are silent on deal terms require either negotiation between the lawyers (not recommended), or reversion back to the buyer and seller to get them to negotiate the previously unresolved issue.

This means that the decisions you make at the LOI stage, structure, price, payment terms, representations, exclusivity period, are decisions you are largely committed to. A seller who signs an LOI without fully understanding the structure implications, or without having run the tax analysis, has already given up significant leverage.

We review and negotiate LOIs for every client before they sign. The cost of that review is negligible compared to the cost of signing an LOI that does not reflect what you actually agreed to (or think you agreed to), or that commits you to a structure that costs you money.

What Should a Good LOI Include?

A well-drafted LOI for a lower mid-market transaction should address:

1. Purchase price and any adjustments (working capital, earnouts).

2. Deal structure (share purchase or asset purchase), together with sufficient detail to ensure that the parties aren’t negotiating terms that could sink the deal (interest rates, payment dates, security, financing sources and priority, etc.).

3. Payment terms (cash at closing, vendor take-back, earnout).

4. Key conditions to closing (financing, due diligence, third-party consents).

5. Exclusivity period and scope.

6. Confidentiality obligations.

7. Proposed timeline to closing.

8. Employee matters, if relevant.

9. Treatment of existing debt and transaction costs.

An LOI that is silent on any of these points is an LOI that will cause problems later.

The Bottom Line

The LOI is not a preliminary formality. It is the document that sets the terms your deal will be built on. Think of it like the foundation for a house. Without a strong foundation, the house could collapse. You can build reinforcements along the way to prevent it, but the better strategy would have just been to build a strong foundation. The idea that the parties should just enter into an LOI and negotiate the terms at the definitive agreement stage is exactly the same.

Outsiders Law negotiates and drafts LOIs for Alberta buyers and sellers as part of every M&A engagement. If you are approaching an LOI stage on a transaction, the best time to talk to us is now.

For more on the M&A process, visit our Mergers & Acquisitions page or our Selling Your Business in Alberta page.

This article is for general informational purposes only and does not constitute legal advice. It does not create a solicitor-client relationship and should not be relied upon as a substitute for advice tailored to your specific transaction or circumstances. If you're navigating the complexities of M&A, remember that the details matter. For expert guidance, feel free to contact Outsiders Law.