Publication Jul 2026

Before you sign the LOI: What business owners need to know

This story was originally published by Law360™ Canada, (www.law360.ca) a division of LexisNexis Canada.

By Charlie Kim, Matthew McGuigan and Jacob Greenbaum

When business owners begin the process of selling their business, the execution of a letter of intent (LOI) is an integral moment. The LOI puts in writing the key terms for a definitive purchase agreement.

When sellers receive an LOI, the first thing they look for is the purchase price. The excitement of their future riches entices them to move the transaction forward — too often signing quickly without the involvement of an M&A lawyer. By the time lawyers are involved, business terms may already have been established to the benefit of the purchaser, thereby diminishing the seller’s negotiating leverage.

The LOI is not a mere formality, and an M&A lawyer should not be bypassed at the LOI stage. Rather, lawyers should be involved from the get-go to draft and negotiate the LOI.

What is an LOI?

An LOI is a preliminary document that is intended to set out the key terms of a proposed transaction. It usually addresses the purchase price, payment structure, tentative closing date, conditions to closing, confidentiality, exclusivity and other major business terms. The purpose is to ensure the parties agree on the broader business terms before spending significant time and resources on the deal.

Binding sections of LOIs

Most LOIs state that they are non-binding, except for certain sections. A well-drafted LOI should identify which provisions are intended to be binding. Common binding provisions include confidentiality, exclusivity, governing law and non-solicitation obligations. Two of these are especially important for sellers:

Confidentiality: A non-disclosure agreement is sometimes signed before the LOI stage because a purchaser will need preliminary financial and operational information to assess the business and prepare its offer. However, in instances where a standalone non-disclosure agreement has not been signed, the LOI should include a confidentiality clause. Over the course of a transaction, a seller will provide sensitive information including corporate, financial, employee, tax and operational information. The confidentiality provision should address how that information may be used, who may receive it, how it should be protected and what happens to it if the transaction falls apart.
Exclusivity: Exclusivity is one of the most important provisions in an LOI. From the purchaser’s perspective, exclusivity is a prerequisite for it to invest substantial time and resources into the deal. A purchaser will therefore want broad exclusivity obligations that last long enough to complete due diligence and negotiate definitive terms.

For the seller, agreeing not to negotiate with other prospective buyers effectively takes the business off the market. If there are other interested purchasers, an extended or overly restrictive exclusivity period can cause those discussions to lose momentum or disappear entirely. The seller should carefully consider the length of the exclusivity period, the activities it prohibits, and whether the exclusivity period should end if the purchaser is not moving the transaction forward. A well-drafted and well-negotiated LOI balances the purchaser’s need for a reasonable period of exclusivity with the seller’s need to preserve other opportunities if the transaction is not progressing.

The LOI can shift negotiating leverage

The non-binding sections often shape the parties’ expectations and negotiations, especially for the purchaser. A sophisticated purchaser will know which purchaser-friendly terms to include in the LOI. Those terms may be overlooked by a seller who is focused primarily on the purchase price and assumes that the rest of the LOI can be revisited later. However, once the deal is underway, it can become difficult for the seller to revisit these terms.

Sellers who involve an M&A lawyer late risk missing key provisions in the LOI. When their lawyer does identify risks after the LOI has been signed and explains the consequences of such risks to them, there is a push to renegotiate the deal terms. However, after an LOI is executed, purchasers typically take the position that the deal points have already been agreed upon. Even where the purchaser agrees to renegotiate the term, the change may require the seller to make a concession elsewhere. Sometimes the consequences can be so material that a purchase price that initially appeared attractive may be less enticing once the seller understands the risks associated with the terms in the LOI. However, by that time, the seller has made a significant investment of time and resources into the deal that walking away is not a viable option from the seller’s perspective.

The LOI may matter even after closing

Even if certain provisions of the LOI are non-binding, courts may still look to the LOI to help interpret the purchase agreement and the parties’ intentions when there is ambiguity. In Project Freeway Inc. v. ABC Technologies Inc., 2025 ONCA 855, the seller was entitled to potential earn-out payments following the sale of several companies. After closing, the target completed various transactions, and the parties disputed whether such transactions triggered the immediate payment of the maximum earn-out. The trial judge relied upon the non-binding LOI to ascertain the parties’ intentions with respect to the impugned provision.

The Ontario Court of Appeal upheld the trial judge’s decision to consider the earlier non-binding LOI

when interpreting the ambiguous provision. This occurred even though the purchase agreement contained an entire agreement clause stating that the final agreement superseded earlier negotiations and documents, including the LOI.

Sellers should therefore not assume that an LOI becomes irrelevant once the purchase agreement is signed. Care should be taken to ensure the LOI accurately reflects the intended terms.

Get an M&A lawyer involved from the beginning

Prospective sellers should engage an M&A lawyer to review and negotiate the LOI. An LOI is often the first document in an M&A transaction, and it can influence everything that follows. The best time to protect the seller’s negotiating leverage is before the LOI is signed, not after the transaction has gained momentum.

A lawyer will flag hidden risks and make sure the seller understands what is being agreed to. They will also identify whether any important provisions are missing from the LOI, including protections that the seller may not initially think to raise but would typically be addressed in the purchase agreement.

Charlie Kim is a Partner in the Business & Transactions Group at Robins Appleby LLP. Drawing on over 15 years of experience as a business lawyer in Ontario, he counsels private equity firms, business owners, and lenders in a Canadian, cross-border and international context. He has authored a series of legal articles on numerous business law related issues, including shareholder rights and corporate governance.

Matthew McGuigan is an Associate in the Business & Transactions Group at Robins Appleby LLP. He is an Ontario lawyer advising on mergers and acquisitions, debt financing, private capital markets, and shareholder and partnership arrangements in the Canadian, cross-border, and international context. With a dual JD/HBA from Western University and Ivey Business School, Matthew applies his business acumen to address his client's legal needs.

Jacob Greenbaum is a 2L summer student at Robins Appleby LLP.

At Robins Appleby, we have been providing legal advice for over 70 years to entrepreneurs, businesses, financial institutions, and foreign companies operating in Canada. Located in Toronto's financial district, our firm is trusted by clients to help solve critical, time-sensitive issues. We offer a wide range of legal services including business and transactions, affordable and social housing, litigation and dispute resolution, commercial real estate development, tax law, employment law, and estate planning.