Buying or selling a business is a major transaction that requires careful planning, clear communication, and proper legal documentation. While most people focus on the final Share Purchase Agreement (SPA) or Asset Purchase Agreement (APA), an often overlooked but critical first step is the Letter of Intent (LOI), which lays the groundwork before the SPA or APA is prepared.
The LOI acts as a roadmap for the transaction. It sets out the key terms that the buyer and seller have agreed to in principle and creates a structured path for due diligence, negotiation, and ultimately, the drafting of the definitive purchase agreement. Though usually non-binding, the LOI is instrumental in laying the foundation for a smooth and efficient deal process.
Why the LOI Matters
A well-crafted LOI does more than just outline a handshake deal. It brings structure, reduces uncertainty, and helps both parties assess whether moving forward is worth the time and cost. Here are the key benefits:
1. Clarity on Key Deal Terms
The LOI outlines the essential terms of the transaction, such as the purchase price and payment structure, whether the deal is a share sale or asset sale, the timeline for due diligence and closing, and the proposed treatment of employees, contracts, and liabilities. Having these terms documented early prevents confusion and helps ensure both parties are aligned before investing further time and money.
2. Framework for Due Diligence
One of the LOI’s primary functions is to grant the buyer access to conduct due diligence—typically including a review of financial records and tax filings, major customer and supplier agreements, employment contracts and benefits, and intellectual property and legal compliance. In share purchases, where the buyer assumes the corporation’s liabilities, due diligence is even more critical. The LOI helps the parties agree on the scope and process of this review.
3. Exclusivity and Confidentiality
LOIs often include exclusivity clauses, where the seller agrees not to negotiate with other potential buyers for a set period. Most also contain confidentiality provisions to protect sensitive information shared during due diligence. These clauses foster trust and encourage honest, productive negotiation—knowing the deal is being treated with the seriousness it deserves.
4. Identifies Deal Breakers Early
A well-drafted LOI can quickly uncover potential deal breakers—such as disagreements over price, working capital adjustments, or non-compete terms—before the parties commit legal resources to drafting a full purchase agreement. Catching red flags at this stage saves time, legal costs, and potential frustration down the line.
5. Stronger Negotiating Position
Although an LOI is generally non-binding, it signals a serious intent to move forward. The LOI can assist with negotiation discussions and help keep the process focused. In addition, an LOI that reflects mutual understanding on major terms gives both sides a useful benchmark during the drafting of the SPA or APA.
6. When to Engage Legal Counsel
Although the LOI is considered a preliminary document, involving legal counsel early can help prevent costly oversights. An experienced lawyer can draft an LOI that clearly distinguishes between binding and non-binding terms and ensures all essential aspects of the proposed transaction are properly addressed.
Final Thoughts
The Letter of Intent is more than a formality—it’s a vital tool in the sale of a business. By clearly defining expectations and reducing ambiguity early on, it sets the stage for a smoother, more efficient transaction.
Whether you are buying or selling a business, taking the time to negotiate a thoughtful LOI can help you avoid costly disputes and surprises down the road.
If you are considering buying or selling a business, feel free to contact Peter Gottschlich at peter.gottschlich@millsandmills.ca and he would be happy to help.
At Mills & Mills LLP, our lawyers regularly help clients with a wide range of legal matters including business law, real estate law, estate law, employment law, health law, and tax law. For over 140 years, we have earned a reputation amongst our peers and clients for quality of service and breadth of knowledge. Contact us online or at (416) 863-0125. The material provided through the Mills & Mills LLP website is for general information purposes only. It is not intended to provide legal advice or opinions of any kind.
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