Letter of Intent for Business Purchase: Complete Guide
Master the LOI process with our comprehensive guide covering the 11 essential components, binding vs. non-binding provisions, and negotiation strategies for Canadian business acquisitions.
What is a Letter of Intent in Business Acquisition?
A Letter of Intent (LOI) is a formal document outlining the preliminary terms and conditions under which a buyer proposes to purchase a business. It serves as a bridge between initial interest and the final purchase agreement, establishing exclusivity and demonstrating serious buyer commitment.
Non-Binding (Mostly)
Commercial terms like price and payment structure are typically non-binding, allowing flexibility during due diligence.
Binding Provisions
Confidentiality, exclusivity, good faith negotiation, and cost responsibility are legally enforceable.
Time-Limited
Typically valid for 3-4 business days, sometimes 1-2 weeks for complex transactions.
When is a Letter of Intent Used?
The LOI serves three critical functions in the business acquisition process
Market Entry Point
The LOI is typically submitted after initial discussions and preliminary financial review. It signals that you've moved beyond casual interest to serious consideration.
Timing: After: Initial meeting, financial review, preliminary valuation
Purpose: Demonstrates credibility and commitment to the seller
Exclusivity Window
The LOI establishes an exclusivity period (3-4 days to 1-2 weeks) during which the seller cannot negotiate with other buyers. This protects your investment in due diligence.
Timing: Duration: 3-4 business days standard, 1-2 weeks for complex deals
Purpose: Secures your position while conducting due diligence
Seriousness Signal
Submitting a well-structured LOI differentiates you from tire-kickers. Sellers often receive multiple inquiries but few formal LOIs, making yours stand out.
Timing: Before: Definitive purchase agreement, final closing
Purpose: Filters serious buyers and establishes negotiation framework
Where the LOI Fits in the M&A Timeline
Phase 1: Initial Contact
Week 1-2- →Buyer discovers business listing
- →Initial conversation with seller/broker
- →Review of basic financials (P&L, revenue)
- →Preliminary valuation assessment
Phase 2: Letter of Intent
Week 3- →Buyer submits formal LOI
- →Seller reviews and negotiates terms
- →Exclusivity period begins (3-4 days)
- →Initial deposit/earnest money may be paid
Phase 3: Due Diligence
Week 4-10- →Full financial audit and verification
- →Legal review of contracts and compliance
- →Operational assessment and customer analysis
- →Financing approval and documentation
Phase 4: Purchase Agreement
Week 11-14- →Legal teams draft definitive agreement
- →Final price and terms negotiation
- →Contingencies addressed and resolved
- →Purchase agreement signed
Phase 5: Closing
Week 15-16- →Final walkthrough and verification
- →Funds transfer and ownership documents
- →Business transition and training begins
- →Post-closing adjustments if applicable
11 Key Components Every LOI Must Include
1Party Identification
Non-BindingClearly identify the buyer and seller by full legal names, addresses, and business entities (if applicable).
Party Identification
Non-BindingClearly identify the buyer and seller by full legal names, addresses, and business entities (if applicable).
What to Include:
Include: Full legal names, business entities (LLC, Corp, Partnership), addresses, contact information
Example:
Buyer: John Smith, 123 Main St, Kelowna, BC | Seller: ABC Corp Inc., 456 Business Ave, Calgary, AB
👤 Buyer Focus
Verify seller has authority to sell
🏢 Seller Focus
Confirm buyer's legal identity and capacity
2Business Identification and Purchase Price
Non-BindingDescribe the business being purchased and state the proposed purchase price. Specify whether it's an asset sale or share sale.
Business Identification and Purchase Price
Non-BindingDescribe the business being purchased and state the proposed purchase price. Specify whether it's an asset sale or share sale.
What to Include:
Include: Business name, description, assets included, purchase price, sale structure (asset vs. share)
Example:
Purchase of all assets and goodwill of 'Mountain Coffee Co.' for CAD $850,000 (asset sale)
👤 Buyer Focus
Define exactly what's included in sale
🏢 Seller Focus
Ensure price reflects current market value
3Payment Terms and Deposit/Earnest Money
Non-BindingOutline how the purchase price will be paid, including down payment, financing, and seller financing if applicable.
Payment Terms and Deposit/Earnest Money
Non-BindingOutline how the purchase price will be paid, including down payment, financing, and seller financing if applicable.
What to Include:
Include: Down payment amount, deposit/earnest money, financing sources (bank, SBA, seller), payment schedule
Example:
10% deposit ($85K), 40% bank loan ($340K), 50% seller financing ($425K over 5 years at 5%)
👤 Buyer Focus
Minimize deposit, maximize financing options
🏢 Seller Focus
Require sufficient deposit to ensure commitment
4Closing Timeline and Conditions
Non-BindingSpecify the proposed closing date and any conditions that must be met before closing.
Closing Timeline and Conditions
Non-BindingSpecify the proposed closing date and any conditions that must be met before closing.
What to Include:
Include: Target closing date, conditions precedent (financing approval, due diligence completion), timeline milestones
Example:
Closing within 90 days, subject to satisfactory due diligence and bank financing approval
👤 Buyer Focus
Build in sufficient time for due diligence
🏢 Seller Focus
Set realistic timeline to maintain momentum
5Financing Contingencies
Non-BindingState that the purchase is contingent upon buyer securing financing on acceptable terms.
Financing Contingencies
Non-BindingState that the purchase is contingent upon buyer securing financing on acceptable terms.
What to Include:
Include: Financing amount required, acceptable interest rates, deadline for financing approval
Example:
Contingent upon buyer securing bank financing of $340K at ≤8% interest within 45 days
👤 Buyer Focus
Include broad financing contingency as exit
🏢 Seller Focus
Require proof of financing capacity upfront
6Due Diligence Access and Timeline
BINDINGGrant buyer access to all business records, financials, and operations for verification during a specified period.
Due Diligence Access and Timeline
BINDINGGrant buyer access to all business records, financials, and operations for verification during a specified period.
What to Include:
Include: Due diligence period duration (30-60 days), access to records, site visits, customer/supplier contact
Example:
45-day due diligence period with full access to financials, customer data, and operational records
👤 Buyer Focus
Maximize access to all business information
🏢 Seller Focus
Protect confidentiality while providing access
7Confidentiality and Non-Disclosure
BINDINGRequire buyer to keep all business information confidential and use it only for transaction evaluation.
Confidentiality and Non-Disclosure
BINDINGRequire buyer to keep all business information confidential and use it only for transaction evaluation.
What to Include:
Include: Scope of confidential information, permitted disclosures, return of materials if deal fails
Example:
Buyer agrees to keep all financial and operational data confidential, NDA terms incorporated by reference
👤 Buyer Focus
Limit restrictions on sharing with advisors
🏢 Seller Focus
Ensure comprehensive confidentiality protection
8Exclusivity Clause (No-Shop Period)
BINDINGSeller agrees not to solicit or negotiate with other buyers for a specified period (typically 3-4 business days to 1-2 weeks).
Exclusivity Clause (No-Shop Period)
BINDINGSeller agrees not to solicit or negotiate with other buyers for a specified period (typically 3-4 business days to 1-2 weeks).
What to Include:
Include: Exclusivity duration, seller obligations during period, consequences of breach
Example:
Seller grants 4-business-day exclusivity; no solicitation of other offers during this period
👤 Buyer Focus
Extend exclusivity as long as possible
🏢 Seller Focus
Limit to shortest reasonable period (3-4 days)
9Employee Considerations
Non-BindingAddress how existing employees will be treated post-acquisition, including retention, severance, or termination.
Employee Considerations
Non-BindingAddress how existing employees will be treated post-acquisition, including retention, severance, or termination.
What to Include:
Include: Key employee retention plans, severance obligations, benefit continuation
Example:
Buyer intends to retain all employees; key manager retention bonus of $25K subject to 12-month stay
👤 Buyer Focus
Identify key employees critical to transition
🏢 Seller Focus
Protect employee interests where possible
10Cost Responsibility
BINDINGSpecify who pays for legal fees, due diligence costs, broker commissions, and other transaction expenses.
Cost Responsibility
BINDINGSpecify who pays for legal fees, due diligence costs, broker commissions, and other transaction expenses.
What to Include:
Include: Legal fees, accounting fees, broker commissions, due diligence costs, filing fees
Example:
Each party pays own legal fees; seller pays broker commission; buyer pays due diligence costs
👤 Buyer Focus
Minimize your cost obligations
🏢 Seller Focus
Ensure buyer has skin in the game
11Binding vs. Non-Binding Designation
BINDINGClearly state which provisions are legally binding and which are non-binding expressions of intent.
Binding vs. Non-Binding Designation
BINDINGClearly state which provisions are legally binding and which are non-binding expressions of intent.
What to Include:
Include: Explicit designation of binding sections, governing law, dispute resolution
Example:
Sections 6, 7, 8, and 10 are binding; all other sections are non-binding expressions of intent. Governed by BC law.
👤 Buyer Focus
Keep commercial terms non-binding for flexibility
🏢 Seller Focus
Ensure binding provisions are enforceable
Buyer vs. Seller Perspectives: What to Focus On
Buyer Priorities
Maximum Flexibility
Keep commercial terms (price, payment) non-binding so you can renegotiate after due diligence reveals issues.
Strong Contingencies
Include broad financing and due diligence contingencies as exit options if the deal turns unfavorable.
Extended Due Diligence
Negotiate 45-60 day due diligence period to thoroughly verify all seller claims and financial representations.
Information Access
Demand full access to financials, customer data, supplier contracts, and operational systems during exclusivity.
Reduced Deposit
Minimize earnest money deposit (5-10%) to limit risk if deal doesn't close.
Seller Support
Include seller training/transition assistance in LOI to ensure knowledge transfer post-closing.
Seller Priorities
Buyer Commitment
Require meaningful earnest money deposit (10-15%) to filter out non-serious buyers and ensure commitment.
Short Exclusivity
Limit exclusivity to 3-4 business days to maintain leverage and avoid being tied up with one buyer too long.
Proof of Funds
Demand evidence of buyer's financing capacity (pre-approval letter, bank statements) before granting exclusivity.
Confidentiality Protection
Ensure strong NDA provisions to protect customer lists, financials, and trade secrets from competitive disclosure.
Limited Due Diligence
Set reasonable due diligence timeline (30-45 days) to prevent indefinite dragging and maintain deal momentum.
Price Protection
Include good faith negotiation clause to prevent buyer from drastically renegotiating after due diligence.
LOI Template Structure Overview
Letter of Intent to Purchase Business
Simplified structure for Canadian business acquisitions
Opening
Date, buyer identification, seller identification, subject business description
1. Purchase Price and Structure
Total purchase price, payment breakdown (down payment, financing, seller note), asset vs. share sale designation
2. Deposit and Earnest Money
Deposit amount, payment timeline, escrow arrangement, refund conditions
3. Closing Date and Conditions
Target closing date, conditions precedent (financing, due diligence, regulatory approvals)
4. Due Diligence
Due diligence period (30-60 days), scope of access, buyer's right to terminate if unsatisfactory
5. Financing Contingency
Financing amount required, acceptable terms, deadline for approval, buyer's right to withdraw if financing denied
6. Confidentiality (BINDING)
Non-disclosure obligations, permitted disclosures to advisors, return of materials, duration of confidentiality
7. Exclusivity (BINDING)
No-shop period duration (3-4 days), seller's obligations, consequences of breach
8. Employee Matters
Retention plans, severance obligations, key employee arrangements
9. Costs and Expenses (BINDING)
Who pays legal fees, broker commissions, due diligence costs, transaction fees
10. Good Faith Negotiation (BINDING)
Commitment to negotiate purchase agreement in good faith, best efforts to close
11. Governing Law and Binding Nature
Designation of binding vs. non-binding sections, governing jurisdiction (BC/Alberta), dispute resolution
Signatures
Buyer signature and date, seller signature and date
⚠️Legal Review Required: Always have a Canadian business lawyer review your LOI before submission. Legal fees typically range from $1,000-$3,000 for LOI review and are a worthwhile investment to protect your interests in BC or Alberta transactions.
Common LOI Mistakes to Avoid
Making Everything Binding
Consequence: You lose negotiation flexibility after due diligence reveals issues. Keep commercial terms non-binding.
✓ Fix: Only make confidentiality, exclusivity, good faith, and costs binding. Everything else should be non-binding.
Too Long Exclusivity Period
Consequence: Seller locked in for weeks while you take your time. Seller gets frustrated and deal momentum dies.
✓ Fix: As buyer: negotiate 1-2 weeks max. As seller: insist on 3-4 business days standard.
No Financing Contingency
Consequence: You're committed to buy even if you can't secure financing. You forfeit your deposit.
✓ Fix: Always include financing contingency with specific terms (amount, rate, timeline).
Vague Due Diligence Language
Consequence: Seller restricts your access to critical information. You can't properly evaluate the business.
✓ Fix: Specify exactly what you need access to: financials, customer data, supplier contracts, operational systems.
No Cost Allocation
Consequence: Surprise bills for legal fees, broker commissions, and transaction costs. Dispute over who pays.
✓ Fix: Explicitly state who pays what: legal fees, broker fees, due diligence costs, filing fees.
Inadequate Confidentiality
Consequence: Buyer shares sensitive information with competitors or uses it improperly. Seller's business damaged.
✓ Fix: Include comprehensive NDA provisions or incorporate existing NDA by reference.
No Employee Protection
Consequence: Key employees leave before closing, destroying business value. Seller relationship damaged.
✓ Fix: Address employee retention, severance, and key person arrangements in LOI.
Unrealistic Timeline
Consequence: Deal drags on for months, momentum dies, seller loses interest, opportunity cost increases.
✓ Fix: Set realistic closing timeline (60-90 days) with milestone dates for financing and due diligence.
What Happens After the LOI is Signed?
Due Diligence Phase Begins (30-60 Days)
The buyer conducts a comprehensive investigation to verify all seller representations and uncover any undisclosed risks or liabilities.
Financial Due Diligence
- → 3-5 years of financial statements
- → Tax returns and CRA compliance
- → A/R and A/P aging reports
- → Profit & loss by product/service line
Operational Due Diligence
- → Customer and supplier contracts
- → Employee agreements and benefits
- → Licenses, permits, and compliance
- → Intellectual property and assets
Financing Approval Process (30-45 Days)
The buyer works with lenders to secure financing based on the due diligence findings and business valuation.
Bank/SBA Loan Application
Submit business plan, personal financial statements, and down payment verification
Seller Financing Negotiation
Finalize seller note terms, interest rate, repayment schedule, and security
Financing Commitment
Receive formal loan commitment letter with final terms and conditions
Purchase Agreement Drafting (2-4 Weeks)
Legal teams draft the definitive purchase agreement, incorporating LOI terms and addressing issues discovered during due diligence.
The purchase agreement is a comprehensive legal document that includes:
- • Final purchase price and payment terms (may be adjusted from LOI based on due diligence)
- • Detailed asset/share transfer provisions and schedules
- • Representations and warranties from both parties
- • Indemnification and liability provisions
- • Closing conditions and post-closing covenants
- • Non-compete and confidentiality agreements
Final Walkthrough and Closing (1-2 Days)
Final verification, funds transfer, document signing, and business ownership transition.
Final Walkthrough: Verify business condition, inventory, and assets match agreement
Funds Transfer: Wire down payment and loan funds to escrow/seller
Document Signing: Execute purchase agreement, bills of sale, transition agreements
Transition Begins: Seller training, customer introductions, operational handover
💡 Pro Tip: Maintain Deal Momentum
The period between LOI and closing is critical. Set clear milestone dates, communicate regularly with all parties, and address issues promptly. Most failed acquisitions collapse during due diligence due to poor communication, not fundamental deal problems. Consider reading our due diligence checklist to stay organized.
Frequently Asked Questions About LOIs
What is a Letter of Intent (LOI) in a business purchase?
A Letter of Intent (LOI) is a formal document outlining the preliminary terms and conditions under which a buyer proposes to purchase a business. It demonstrates serious buyer interest, establishes exclusivity for negotiation, and provides a framework for due diligence before the final purchase agreement. Most LOIs are non-binding for commercial terms but binding for confidentiality and exclusivity.
Is a Letter of Intent legally binding?
An LOI is typically non-binding for commercial terms (price, payment structure), but certain provisions are binding including confidentiality, exclusivity, good faith negotiation, and cost responsibility. The LOI should clearly designate which sections are binding and which are not. Always have a lawyer review your LOI to ensure proper designation.
How long is a Letter of Intent valid?
Most LOIs have a validity period of 3-4 business days, during which the seller agrees to exclusivity and cannot negotiate with other buyers. Complex transactions may extend this to 1-2 weeks. The validity period is typically binding and enforceable. Buyers want longer periods for due diligence; sellers prefer shorter periods to maintain leverage.
What are the 11 key components every LOI must include?
Essential LOI components include: (1) Party identification, (2) Business identification and purchase price, (3) Payment terms and deposit, (4) Closing timeline and conditions, (5) Financing contingencies, (6) Due diligence access and timeline, (7) Confidentiality/non-disclosure, (8) Exclusivity clause, (9) Employee considerations, (10) Cost responsibility, and (11) Binding vs. non-binding designation.
What happens after an LOI is signed?
After LOI signing, the buyer enters the due diligence phase to verify business claims, review financials, and assess risks. Simultaneously, the buyer secures financing and legal teams draft the definitive purchase agreement. This period typically lasts 30-90 days, culminating in the final purchase agreement and closing.
Should I use a lawyer to draft an LOI?
Yes, especially for Canadian business transactions. A lawyer ensures proper binding vs. non-binding designations, protects your interests, includes necessary contingencies, and ensures compliance with provincial laws in BC or Alberta. Legal fees for LOI review typically range from $1,000-$3,000 and are a worthwhile investment to avoid costly mistakes.
Can I renegotiate price after signing an LOI?
Yes, if the commercial terms (price, payment structure) are designated as non-binding in the LOI. Most LOIs keep price non-binding to allow renegotiation if due diligence reveals issues. However, you must negotiate in good faith and provide justification for price adjustments. Avoid drastic renegotiation without cause, as it damages trust.
How much earnest money should I offer in an LOI?
Buyers typically offer 5-15% of the purchase price as earnest money/deposit. Lower deposits (5-10%) show less commitment but reduce risk. Higher deposits (10-15%) demonstrate seriousness and strengthen your offer. The deposit is usually held in escrow and applied to the purchase price at closing, or returned if financing contingencies aren't met.
Continue Your Business Acquisition Journey
Business Due Diligence Checklist
Complete checklist for investigating a business after LOI signing. Financial, legal, and operational review guides.
How to Find Businesses to Buy
Strategies for sourcing acquisition targets in BC and Alberta. Online listings, brokers, and off-market opportunities.
Contact Us for Help
Need help structuring your LOI or navigating the acquisition process? Schedule a consultation with our M&A team.
Need Help Structuring Your Letter of Intent?
Our experienced M&A team helps buyers and sellers structure effective LOIs that protect your interests while maintaining deal momentum. From initial drafting to final negotiation, we ensure your LOI positions you for a successful closing.