Is a Letter of Intent Binding When Buying a Business?

When two parties agree in principle to a business sale, the first substantial document they usually sign is a letter of intent (LOI) — sometimes called a term sheet or memorandum of understanding. It records the deal the parties believe they have reached, in enough detail to guide the lawyers and accountants who will draft the definitive purchase agreement.

The recurring question — is a letter of intent binding — has a frustrating but accurate answer: it depends on the document, usually on a clause-by-clause basis. A well-drafted LOI is deliberately hybrid. Most of it is not meant to bind anyone to complete the transaction, while a handful of provisions are meant to be fully enforceable from the moment of signing.

The structure is practical. Neither side wants to commit to closing before due diligence, financing, and detailed negotiation are complete — but both want certain protections locked in while they get there. Knowing which parts do which is the difference between a useful roadmap and an accidental contract.

Most of a letter of intent describes the commercial terms the parties intend to negotiate toward. These provisions signal direction; they are not promises to close. They typically cover:

• The purchase price, or a price range and how it will be adjusted
• Whether the deal is structured as an asset purchase or a share purchase
• What is included in and excluded from the sale
• Key conditions such as satisfactory due diligence, financing, and third-party consents
• The anticipated timeline to signing and closing

These terms are labelled — or should be labelled — as non-binding expressions of intent, subject to a definitive agreement. The point is to confirm both sides are broadly aligned before investing in lawyers, valuations, and diligence.

Because they are non-binding, either party can generally walk away, and the price and structure can shift as diligence turns up new facts. That flexibility is a feature — but it also means an LOI is not the safety net some sellers assume. Signing one does not guarantee a sale.

Woven through the same document are clauses meant to be fully enforceable the moment the LOI is signed. These are the provisions most likely to end up in court if the deal falls apart, so they deserve as much attention as the price:

• Exclusivity (no-shop): The seller agrees not to solicit or negotiate with other buyers for a defined period. This is often the single most valuable term for a buyer about to spend real money on diligence, who does not want the seller shopping the offer to drive up the price.
• Confidentiality: Both sides agree to keep the negotiations, and the information exchanged during diligence, private — sometimes by incorporating a separate non-disclosure agreement.
• Expenses: Usually each party bears its own costs, though the LOI may allocate specific costs or provide for a break fee if one side walks away in defined circumstances.
• Deposit or standstill terms: Some LOIs include a good-faith deposit, or a standstill preventing the seller from making major changes to the business during negotiations.
• Governing law and dispute resolution: These clauses are typically binding, so any dispute about the binding terms is resolved predictably.

A carefully drafted LOI states expressly that these clauses survive even though the rest of the document does not.

When a dispute arises over whether an LOI created enforceable obligations, courts do not simply take the document's title at face value. They ask, objectively, whether a reasonable person in the parties' position would conclude they intended to be legally bound.

Several factors weigh in that analysis:

• The language used: Words like non-binding, subject to a definitive agreement, and subject to contract signal that no commitment to close was intended; their absence points the other way.
• How complete the terms are: If the LOI settles every essential term and leaves nothing of substance to negotiate, a court is more likely to find a binding contract — even one titled a letter of intent.
• The conduct of the parties: Acting as though a deal is done — transferring funds, taking possession, performing obligations — can show the parties treated themselves as bound, whatever the paper says.
• Whether a formal agreement was contemplated: An express expectation that a later, formal document would be signed suggests the LOI itself was not the final contract.

The label matters, but it is evidence of intention, not the last word. A document that calls itself non-binding but functions like a complete contract can still be enforced — and one meant to be binding can fail for uncertainty if its terms are too vague.

Two recurring traps catch parties who treat the LOI as a mere formality.

The first is the accidental binding agreement. When an LOI is silent on which parts bind and which do not — or when it is packed with detailed, complete terms and signed by both sides — a party who assumed it was 'just a letter' can find a court holding them to the whole thing. The danger is greatest when the document is thorough enough to resemble a purchase agreement and the parties then act on it.

The second is the good-faith negotiation obligation. Many LOIs include a promise to negotiate the definitive agreement in good faith. Whether such a promise is enforceable is a genuinely difficult question. Canadian courts have historically been cautious about enforcing bare 'agreements to agree,' because a court cannot force parties to reach terms they never settled. That said, an express, carefully worded obligation to negotiate in good faith — or an exclusivity clause that constrains conduct during negotiations — can carry real weight.

The practical lesson: the binding and non-binding lines must be drawn deliberately. Ambiguity about which obligations survive signing is what turns a routine LOI into litigation.

An LOI works best when it does two things clearly: frame the intended deal, and lock in the limited protections both sides need during negotiation. A few drafting practices keep those functions from blurring:

1. 1.State expressly, in its own clause, that the document is not binding except for specified provisions — then list those provisions by name.
2. 2.Use consistent language throughout. Mixing 'the parties will' with 'the parties intend to' invites argument about which obligations were meant to bind.
3. 3.Give the exclusivity period a firm start and end date, and say what happens when it expires.
4. 4.Keep the commercial terms at the level of a framework — the more the LOI reads like a finished purchase agreement, the greater the risk a court treats it as one.
5. 5.Address confidentiality, costs, and any deposit precisely, since these are the terms most likely to be tested.
6. 6.Set an expiry date for the LOI itself, so a stale letter does not linger as a source of obligation.

These are not stylistic choices. The wording determines whether a buyer's exclusivity is enforceable, whether a seller can walk away cleanly, and whether either side has accidentally promised more than intended.

It would be a mistake to conclude that, because most of a letter of intent is non-binding, the document is unimportant. In practice, the LOI does much of the heavy lifting in a business purchase.

It forces both sides to confirm the core economics — price, structure, and key conditions — before anyone spends heavily on diligence and legal drafting. It creates momentum and a shared reference point that keeps later negotiations honest. Its exclusivity clause buys the buyer a protected window to investigate the business, and it surfaces deal-breakers early, when walking away is still cheap.

The failures we see come from treating the LOI as a formality: signing a template without marking the binding and non-binding lines, agreeing to an open-ended exclusivity period, or assuming a signed LOI guarantees a sale the definitive agreement has not secured.

At Lamba Law, we prepare and negotiate letters of intent for buyers and sellers across the GTA — drawing the binding lines deliberately, protecting exclusivity and confidentiality, and making sure the letter advances the deal rather than quietly committing a client to one. Whether you are buying or selling, the LOI is where the transaction takes shape, and the time to get it right is before it is signed.