A letter of intent to buy a business sets the price, structure, financing and timetable a buyer is prepared to commit to before diligence starts. In Canada most of an LOI is non-binding, but the terms it records are the ones the vendor will hold the buyer to when the purchase agreement is drafted, so an LOI that leaves the economics vague rarely saves time later.
For a buyer, the LOI does three jobs. It secures exclusivity, it tells the lender what is being financed, and it fixes the assumptions diligence is meant to test. The clauses below are the ones that decide whether the deal closes on the terms that were agreed. Vendors reading the same document from the other side should see our guide to letters of intent in private company sales.
Price, stated as enterprise value with a working capital target
State the price as an enterprise value on a cash-free, debt-free basis, with a normal level of working capital delivered at closing. A single number with no mechanics invites a later dispute over whether the vendor keeps the cash, who repays the operating line and what counts as debt.
Name the debt-like items now: shareholder loans, deferred revenue, accrued bonuses, income taxes owing and equipment leases. Set the working capital target as a figure or a defined trailing average. If the offer is a multiple of normalized EBITDA, state the period and the adjustments it rests on, so diligence tests an agreed number rather than reopening it. Our note on working capital adjustments covers how the target is usually set.
Share purchase or asset purchase
The form of the deal moves after-tax value for both sides and belongs in the LOI, not in the first draft of the purchase agreement. A share purchase usually suits the vendor, because proceeds of disposition on qualified small business corporation shares can be sheltered by the lifetime capital gains exemption. An asset purchase usually suits the buyer: the assets take a capital cost equal to the price allocated to them, which supports capital cost allowance, and historical liabilities stay with the vendor’s corporation.
Where the parties disagree, the gap is a price point, not a drafting point. If the buyer accepts a share purchase for the vendor’s tax benefit, the lost capital cost allowance and the inherited liabilities should show up in the price and in the indemnity terms. Our comparison of an asset sale and a share sale sets out the trade-offs in more detail.
How the price is paid
List each component with its amount: cash at closing, a vendor take-back note, an earnout and any holdback. For a vendor note, state the principal, term, interest rate, security and whether it is subordinated to the senior lender, because the lender will require that subordination. For an earnout, state the metric, the measurement period and who controls the accounting that produces it.
Every deferred component moves risk from the buyer to the vendor, and the vendor’s advisor will price it that way. Our notes on vendor take-back financing, earnouts and holdbacks and indemnities cover the terms that usually decide whether these structures hold up.
The financing condition
A buyer who needs debt should make closing conditional on financing, but the condition has to be specific enough for the vendor to accept it. Name the type of lender, the amount of senior debt, the equity the buyer is contributing and the date by which a commitment letter will be in hand. An open condition that lets the buyer walk for any financing reason will be negotiated down or refused.
Lenders read the LOI. A chartered bank or BDC will want the price, the structure, the vendor note terms and the equity contribution before issuing a term sheet, so inconsistencies in the LOI cost time later. Start lender conversations before the LOI is signed. Our guides to financing a business acquisition in Canada and what lenders look for set out what a credit committee will need.
Diligence scope and the timetable
Describe the diligence the buyer intends to run: financial, tax, legal and commercial, and a quality of earnings review where earnings carry the price. Tie each workstream to a date and state the access the buyer needs, including management time, the data room and, after a defined point, conversations with key customers.
A diligence plan in the LOI protects both sides. The vendor can see that the deal is moving, and the buyer has a written record of the assumptions the price relies on if something material turns up. Our due diligence guide sets out the usual scope for an owner-managed business.
Exclusivity and the termination date
Exclusivity is what the buyer is really getting from the LOI. Ask for a period long enough to finish diligence and secure financing, with an extension tied to progress rather than an automatic renewal. The vendor’s advisor will resist open-ended exclusivity, and a credible timetable is the strongest argument for the period requested.
Add an outside date after which either party may walk away, and state that each party bears its own costs if the deal does not close. A buyer asked for a deposit or a break fee should treat it as a price term and negotiate it as one, with the refund conditions tied to the financing and diligence conditions.
The vendor’s transition and key employees
Most owner-managed businesses depend on the owner for customer relationships, pricing and supervision. Set out the transition the buyer expects: its length, the time commitment and whether it is paid as consulting fees or forms part of the price. Paying for transition work separately keeps purchase price and compensation distinct, for tax and for any later dispute.
If the buyer is relying on particular employees, say so. Closing can be conditional on named managers accepting employment, and the LOI should state whether the buyer intends to keep the workforce on existing terms. The vendor’s non-competition and non-solicitation covenants belong here too, with their length and territory.
Consents, leases and regulated practices
Identify the third-party consents the deal depends on: the landlord’s consent to an assignment or change of control of the lease, change-of-control clauses in key customer and supplier contracts, and licences or permits that do not transfer automatically. Each one is a closing condition, and each one takes time to obtain.
Regulated practices add another layer. Ownership of dental, veterinary and pharmacy practices in British Columbia is governed by each profession’s regulatory college, so the buyer’s eligibility to own should be confirmed before the LOI is signed, not during diligence. A pharmacy purchase, for example, requires the incoming owner to apply to the College of Pharmacists of BC at least 30 days before the change of ownership takes effect. Our note on selling a healthcare, dental or veterinary practice in BC covers the vendor’s side of the same issues.
Which terms bind and which do not
Canadian courts ask two questions when deciding whether a letter of intent is enforceable: whether the essential terms are settled with enough certainty, and whether the parties intended to be bound before a formal agreement was signed. Courts in British Columbia and Ontario have found binding agreements in documents the parties regarded as preliminary, as Clark Wilson’s summary of the case law sets out.
State plainly that the commercial terms are non-binding and that neither party is bound to complete the transaction until a definitive purchase agreement is signed. Then list the provisions that do bind: confidentiality, exclusivity, costs, access to information, governing law and termination. Avoid contract language such as “this agreement” in the non-binding sections, and have transaction counsel review the LOI before it is signed.
An illustrative LOI for a $4M acquisition
The following is an illustration, not a client transaction. A buyer offers $4.0 million for a BC distribution business with $1.0 million of normalized EBITDA in its most recent fiscal year, on a cash-free, debt-free basis with a working capital target of $600,000. The deal is a share purchase, priced on the basis that the vendor intends to claim the lifetime capital gains exemption.
Consideration is $3.0 million in cash at closing, a $600,000 vendor take-back note over 3 years at 6% interest, subordinated to the senior lender, and a $400,000 holdback released after 12 months net of indemnity claims. The cash is funded by $2.0 million of senior term debt and $1.0 million of buyer equity, with a lender term sheet due within 21 days of signing.
Exclusivity runs 60 days, extendable once by 30 days if the quality of earnings report and the lender commitment are both delivered on schedule. The vendor stays for 6 months as a paid consultant and gives a 3-year non-compete in British Columbia. Closing is conditional on the landlord’s consent and on 2 named managers accepting employment. Each line is a term the vendor’s advisor will test, and each gives the lender something concrete to underwrite.
Frequently asked questions
Is a letter of intent to buy a business binding in Canada?
Usually only in part. The commercial terms are normally non-binding, while confidentiality, exclusivity and costs are drafted to bind. A court can still find a binding agreement where the essential terms are settled and the parties’ language and conduct show an intention to be bound, so the LOI should state which provisions bind.
Who prepares the LOI, the buyer or the vendor?
The buyer normally issues it, which lets the buyer frame the price mechanics and conditions. A vendor running a competitive process will sometimes circulate a form of LOI so that offers can be compared on the same terms. Either way, the buyer’s counsel should review it before it is signed.
Can a buyer lower the price after signing the LOI?
Only where diligence changes the assumptions the price rested on. Tying the price to a defined earnings figure and a working capital target makes any adjustment explainable. A buyer who reopens price without that basis usually loses the vendor’s confidence and often the deal.
Should a buyer agree to a deposit?
A deposit is a price term and should be negotiated as one. If the vendor asks for one, define when it becomes non-refundable and tie its return to the financing and diligence conditions, so the buyer is not paying for the right to walk away from a deal that failed for reasons outside its control.
How detailed should an LOI be?
Detailed enough that the purchase agreement records the deal rather than negotiates it. Price mechanics, structure, consideration, financing, exclusivity and the main conditions should all be stated. Representations, warranties and indemnity mechanics can wait for the definitive agreement, with any holdback amount and indemnity cap noted in the LOI.
Next steps
KitsWest Capital advises buyers, management teams and corporate acquirers on acquisitions across British Columbia and Alberta, from the first offer through financing and closing. We structure letters of intent with price mechanics, consideration and conditions that both the vendor and the lender can work with, and we arrange acquisition financing where it is part of the mandate.
If you are preparing an offer for a business, contact KitsWest Capital for a confidential discussion before the LOI goes out. You can also read our guide to buying a business in Canada or review our business sale and acquisition services.
