What is a Letter of Intent (LOI) and how does it work when selling my company?
A Letter of Intent (LOI) is a formal but mostly non-binding document in which a buyer outlines their proposed terms to purchase your business, typically triggering an exclusivity period during which you stop negotiating with other buyers while the buyer completes due diligence. The LOI marks the transition from preliminary discussions to a committed transaction process, and understanding which provisions bind you legally — even though the purchase itself remains non-binding — is critical before you sign.
What a Letter of Intent is and why buyers issue one
An LOI is the buyer's formal proposal after initial conversations and preliminary review of your business. It sets out the economic terms, transaction structure, and process expectations for completing the sale. Buyers issue an LOI to establish a framework for due diligence and to secure exclusivity while they invest time and legal fees into investigating your business.
LOIs for businesses under $5 million in Canada typically run 3–8 pages in length, while LOIs for larger middle-market transactions may extend to 15–25 pages with more detailed terms. In competitive sale processes with multiple interested buyers, sellers may receive multiple LOIs and use them to negotiate better terms before granting exclusivity to one buyer.
Binding vs. non-binding provisions in an LOI
The purchase terms in an LOI — price, structure, closing date — are typically non-binding. Either party can walk away without forcing the transaction to proceed. However, certain provisions are binding on both parties from the moment the LOI is signed:
- Exclusivity: The seller agrees not to solicit or negotiate with other buyers during a specified exclusivity period. This provision is binding on the seller, meaning the seller can face legal consequences for breach even though the overall purchase terms remain non-binding.
- Confidentiality: Confidentiality obligations are binding on both parties and survive even if the transaction does not proceed.
According to the Canadian Bar Association Business Law Section Practice Guide, if a seller breaches exclusivity by continuing negotiations with another buyer, the remedy typically involves the seller covering the breaching party's documented transaction costs rather than forcing the sale to the LOI buyer.
Key terms typically included in a business sale LOI
An LOI commonly addresses the following:
- Purchase price and structure: Most LOIs include a proposed purchase price structure specifying cash at close, seller financing amount and terms, earnout provisions if applicable, and any assumed liabilities.
- Transaction structure: The LOI outlines whether the transaction will be an asset sale or share sale, which has significant tax implications for both buyer and seller in Canadian transactions.
- Working capital adjustment: The working capital adjustment mechanism is frequently outlined in the LOI, establishing how the final purchase price will be adjusted based on the target working capital level at closing.
- Deposit or good faith payment: A deposit or good faith payment accompanying an LOI typically ranges from 1–5% of the proposed purchase price for small to mid-sized transactions, held in escrow and refundable if conditions are not met.
- Conditions precedent: LOIs commonly include conditions that must be satisfied before closing, such as buyer securing financing, landlord consent for lease assignment, key customer contract renewals, and regulatory approvals if applicable.
- Due diligence scope and timeline: Buyers typically request 30–60 days for due diligence within the exclusivity period, during which they will examine financial records, customer contracts, employee agreements, and operational systems.
The LOI stage is when most material price negotiations occur, with final purchase agreements typically varying less than 5–10% from the LOI price unless due diligence reveals material issues.
The exclusivity period and what it means for sellers
An LOI typically includes a 30–90 day exclusivity period during which the seller agrees not to solicit or negotiate with other buyers while the buyer completes due diligence. During this time, you cannot accept competing offers or continue conversations with other interested parties, even if the other buyer offers better terms.
Exclusivity benefits the buyer by protecting their investment in due diligence and legal work. For sellers, exclusivity is a trade-off: you gain a committed buyer willing to invest in the process, but you lose negotiating leverage and risk having the deal fall apart with no backup buyer in place.
Sellers can negotiate the length of the exclusivity period and the conditions under which it expires. You can also negotiate breakup fee provisions that require the buyer to compensate the seller if the buyer walks away without legitimate due diligence findings, though these are less common in small business transactions.
Timeline from LOI to closing
The average time from signed LOI to closing in Canadian small business transactions is 60–120 days, with the majority of that time spent on due diligence and financing approval. The process typically unfolds as follows:
- LOI signed: Exclusivity begins, buyer starts due diligence
- Due diligence (30–60 days): Buyer reviews financials, contracts, operations, legal matters
- Purchase agreement negotiation (2–4 weeks): Lawyers draft and negotiate the binding purchase agreement
- Financing approval (if applicable, 3–6 weeks): Buyer secures financing, often overlapping with due diligence
- Closing preparations (2–3 weeks): Final approvals, third-party consents, closing documents prepared
- Closing: Funds transferred, ownership changes hands
Delays are common. Financing complications, landlord approvals, and due diligence findings frequently extend the timeline beyond the initial exclusivity period, requiring extensions to the LOI.
When to involve legal counsel in reviewing an LOI
You should engage legal counsel to review an LOI before signing, particularly to understand which provisions are binding and to negotiate exclusivity terms that protect the seller's position. An attorney experienced in business transactions can identify problematic clauses, negotiate better terms, and ensure you understand what you are committing to.
Key issues legal counsel will examine include:
- Whether the exclusivity period is reasonable given the transaction complexity
- What happens if the buyer fails to close through no fault of yours
- Whether confidentiality obligations are appropriately scoped
- How conditions precedent are defined and who controls their satisfaction
- Whether the working capital adjustment mechanism is fair and clearly defined
Legal fees at the LOI stage are a fraction of the total transaction cost but can save you from signing terms that limit your negotiating position or leave you exposed if the deal collapses.
Common negotiation points in the LOI stage
Sellers frequently negotiate the following:
- Exclusivity duration: Shortening the exclusivity period from 90 days to 60 days or 45 days reduces your exposure if the buyer is slow or uncommitted.
- Breakup fees: Requiring the buyer to pay a fee if they walk away without material due diligence findings compensates you for lost time and opportunity.
- Price and structure: If you receive multiple LOIs, you can use competing offers to negotiate a higher price, more cash at close, or better earnout terms.
- Conditions precedent: Narrowing the conditions under which the buyer can walk away — for example, defining "material adverse change" — reduces uncertainty.
- Working capital targets: Establishing a clear, formulaic working capital calculation prevents disputes at closing.
Because the purchase terms in the LOI are non-binding, this is your best opportunity to negotiate favorable economics before the binding purchase agreement is drafted.
What happens if the deal falls apart after signing an LOI
Deal breakage rates after signed LOI vary widely by transaction size. Small business deals (under $2M) experience approximately 30–40% breakage, while middle-market deals ($10M+) have lower breakage rates around 15–25%.
Common reasons for deals falling apart post-LOI include material adverse findings in due diligence, buyer financing falling through, seller's undisclosed liabilities surfacing, and significant changes in business performance during the exclusivity period.
If the deal collapses, the seller is typically free to re-enter the market and seek other buyers, though the exclusivity period may have cost you weeks or months during which the business environment or buyer interest may have changed. Confidentiality obligations remain in force, and if you breached exclusivity, you may owe the buyer their documented transaction costs.
If the buyer walks away for reasons unrelated to due diligence findings — for example, simply changing their mind — you have limited recourse unless you negotiated a breakup fee provision into the LOI.
This article is for informational purposes only and does not constitute financial, legal, or business advice. Every business sale is different. Before making decisions about LOI terms, exclusivity, or transaction structure, consult a qualified professional familiar with your specific situation.
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