What happens between signing an LOI and closing a business purchase?
Between signing a letter of intent (LOI) and closing, you complete due diligence, finalize legal documentation, secure financing, obtain third-party consents, and satisfy all closing conditions before funds transfer. The process typically takes 60 to 120 days for small business acquisitions in Canada, with 90 days being common for straightforward transactions.
The LOI creates a framework, not a binding purchase obligation
A letter of intent in a Canadian business acquisition is typically non-binding except for specific provisions including confidentiality, exclusivity, and the treatment of expenses. The LOI outlines the purchase price, transaction structure (asset or share sale), and key terms, but it does not obligate either party to complete the transaction.
Exclusivity (no-shop) periods in Canadian business sale LOIs commonly range from 30 to 90 days, with 60 days being most common for small to mid-market transactions. During this period, the seller agrees not to solicit or negotiate with other buyers. Buyer financing contingencies in Canadian business acquisition LOIs typically specify a deadline — often 30 to 45 days from LOI signing — by which the buyer must secure a firm financing commitment, failing which the buyer may terminate the LOI without penalty.
Due diligence is the buyer's investigation period
Due diligence periods in Canadian small business acquisitions typically last 30 to 60 days, though complex transactions may require 90 days or more. This is your opportunity as the buyer to verify the seller's representations and uncover risks before committing to close.
Financial due diligence
Financial due diligence includes verification of revenue and EBITDA representations, examination of accounts receivable aging, identification of non-recurring expenses, and review of working capital calculations. You are confirming that the financial performance the seller represented in the LOI matches the underlying records.
Working capital adjustments at closing require the buyer and seller to agree on a target working capital level — typically based on trailing average — with post-closing true-up mechanisms adjusting the purchase price up or down based on actual working capital delivered at closing.
Operational due diligence
Operational due diligence examines customer concentration, supplier relationships, employee contracts and key person dependencies, lease terms and transferability, and intellectual property ownership. You are assessing whether the business can continue operating under your ownership without significant disruption.
Legal due diligence
Legal due diligence in Canadian business acquisitions reviews corporate records and minute books, material contracts and change of control provisions, litigation and regulatory compliance history, environmental liabilities, and employment agreements. Material contracts often include change-of-control clauses that require counterparty consent before the transaction can close — identifying these early avoids surprises at closing.
Legal documentation formalizes the transaction structure
The Purchase and Sale Agreement (PSA) in a Canadian business acquisition includes purchase price and payment structure, representations and warranties from both parties, indemnification provisions, closing conditions, and post-closing covenants including non-compete and transition support.
Representations and warranties
Representations and warranties are the seller's statements about the condition of the business — financial accuracy, legal compliance, absence of undisclosed liabilities. These representations typically survive closing for 12 to 24 months for general representations, with fundamental representations (title, authority, capitalization) surviving indefinitely or until the expiry of applicable limitation periods.
Escrow or holdback arrangements in Canadian business acquisitions typically retain 5% to 15% of the purchase price for 12 to 18 months to cover post-closing indemnification claims, with holdback periods extending to 24 months for tax or environmental representations.
Material adverse change clauses
Material adverse change (MAC) clauses in Canadian business sale agreements allow buyers to terminate or renegotiate if significant negative events occur between signing and closing. These events commonly include loss of a major customer (typically defined as 15% to 20% or more of revenue), unexpected litigation, key employee departures, or material financial deterioration.
Non-compete and transition support
Non-compete agreements in Canadian business acquisitions typically restrict the seller from competing within a defined geographic radius — often 25 to 100 km for local businesses — for a period of 2 to 5 years, with 3 years being most common for small businesses.
Transition support from the seller to the buyer commonly lasts 30 to 90 days post-closing, during which the seller introduces the buyer to key customers and suppliers, trains the buyer on operations and systems, and assists with employee integration.
Financing and third-party approvals run in parallel
Bank financing for Canadian business acquisitions typically requires 3 to 6 weeks from application to commitment letter, assuming the buyer has pre-qualified and provided complete financial documentation. Canadian lenders financing business acquisitions commonly require personal guarantees from buyers, collateral security over business assets, proof of buyer equity contribution (typically 20% to 30% of purchase price), and evidence of industry experience or management capability.
Third-party consents required before closing a Canadian business acquisition commonly include landlord consent to lease assignment, franchisor approval for franchise transfers, key customer or supplier contract assignments, and regulatory licenses or permits transfers. Failure to obtain these consents is a common reason deals fail after signing the LOI — start the consent process early in the due diligence period.
Closing conditions must be satisfied before funds transfer
At closing, the buyer's legal counsel delivers the purchase price funds to the seller's counsel (or to escrow), the seller delivers share certificates or asset transfer documents, both parties sign closing documents including the PSA and ancillary agreements (non-compete, transition services, employment agreements), and keys, passwords, and operational access are transferred.
In asset purchases, the buyer in Canada must withhold and remit GST/HST on the purchase price if the transaction does not qualify for the going concern exemption under section 167 of the Excise Tax Act. To qualify for the going concern exemption from GST/HST in Canada, the business or part of the business must be capable of being carried on as an independent business, all or substantially all (90% or more) of the property necessary to carry on the business must be transferred, and the purchaser must intend to continue operating the business (not liquidate assets).
The typical timeline from LOI to closing
The timeline from LOI signing to closing for small business acquisitions in Canada typically ranges from 60 to 120 days, with 90 days being common for straightforward transactions with no financing contingencies. Complex transactions requiring regulatory approvals, extensive due diligence, or multiple third-party consents may extend beyond 120 days.
Common reasons deals fail between LOI and closing
The aggregate fall-through rate — deals that proceed to LOI but do not close — for small business transactions in North America is approximately 20% to 30%, with financing-related failures and due diligence issues being the leading causes.
Common reasons business acquisitions fail between LOI and closing include due diligence revealing undisclosed liabilities or overstated financials, buyer inability to secure financing, failure to obtain required third-party consents (landlord, franchisor, key customers), material adverse changes in the business, and buyer's change of heart or discovery of better opportunities.
This article is for informational purposes only and does not constitute financial, legal, or business advice. Every business purchase is different. Before making decisions about structuring a transaction, conducting due diligence, or engaging an advisor, consult a qualified professional familiar with your specific situation.
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