Canada: The Letter Of Intent: A Critical Transaction Document

As part of negotiating the purchase of a business, the buyer and seller will enter into a letter of intent (LOI) that sets out the framework for a deal. While the terms of the deal as set out in the LOI are non-binding, the LOI does bind the buyer and seller with respect to:

1. the confidentiality of the offer; and

2. the period of exclusivity that the buyer is afforded in order to conduct due diligence on the seller's company, and to negotiate the purchase agreement.

This second point is critical. Sellers tend to have the upper hand in negotiations up to the point that they give exclusivity to one buyer. Once a buyer is afforded exclusivity, they have the negotiating advantage. The dynamics of the negotiations between the buyer and seller can be graphically depicted in what is sometimes called the "buyer-seller advantage curve."


The seller initially has the negotiating advantage because of his/her ability to conduct an auction for the sale of the business and have potential buyers compete against each other. However, once the seller affords exclusivity to a single buyer, that buyer has the negotiating advantage. This is because the seller is restricted from entering into discussions with another buyer for the length of the exclusivity period, which usually ranges from 60 to 120 days. After that time, it's difficult for the seller to re-engage other interested buyers, who will be wary as to why the deal did not close. At the very least, the seller will find him/herself in a much weakened negotiating position with other buyers, and consequently may receive a lower price or less favourable terms. Therefore, it's important for the seller to "bet on the right horse" and to know exactly what he/she is getting into.

Furthermore, once a particular buyer is granted exclusivity, they will have access to highly sensitive information regarding the seller's business as part of the due diligence process. This includes such things as customer names, payroll records and trade secrets. If the seller does not strike a deal with the buyer to whom it affords exclusivity, the seller runs the risk of having a competitor with detailed knowledge of its operations. While the parties may have executed a non-disclosure agreement, such agreements provide limited protection. As a practical matter, a breach of confidentiality is both difficult to prove and costly to enforce.


As evidenced from the buyer-seller advantage curve, the seller's negotiating strategy should be to defer giving a buyer exclusivity for as long as practical, and to execute a relatively short exclusivity period. The seller's greatest exposure is between the time that the LOI is signed and the deal is closed.

From the seller's perspective, it's critical to negotiate a comprehensive LOI that clearly sets out all of the major elements of the transaction. While the terms of an LOI are non-binding, it's more difficult for a buyer to change a written agreement, at least without adequate justification (such as new material information) or offering something in return. The negotiation of the LOI is the pinnacle of the seller's negotiating advantage. If the seller can't negotiate a strong LOI, he/she will never be in a position to negotiate a favourable purchase agreement.

In many cases, the buyer will state that it's not possible to be specific as to terms in the LOI because they have not been afforded the opportunity to conduct detailed due diligence. While this may be true, the seller should offer the buyer certain assumptions that they can use to construct the LOI. Once those assumptions are confirmed in the due diligence process, it provides the seller with greater comfort as to what the terms of the transaction will be.

Another reason for insisting on detailed terms in the LOI is to facilitate the finalization of the purchase agreement. The purchase agreement is normally negotiated between the seller's and buyer's counsel, using the LOI as a template. The more comprehensive the LOI, the less room there is for the lawyers to disagree on the intention of the parties. This can help to significantly reduce the cost and time required to finalize the purchase agreement.


As evidenced from the buyer-seller advantage curve, the buyer should strive to attain exclusivity at an early stage, and secure an exclusivity period as long as possible in order to maximize their negotiating leverage.

While the seller will want a comprehensive, unambiguous LOI, the buyer will usually want the opposite in order to maximize their negotiating flexibility once afforded exclusivity. This doesn't mean that buyers should look for excuses to "grind down" the seller. Rather, added flexibility will provide the buyer with greater opportunity to structure a transaction that meets their needs, and which addresses the buyer's findings during due diligence.

Caution is warranted, however. By negotiating an LOI that is too broad, the buyer may be setting the stage for deal failure if there is not an adequate understanding of what the transaction will look like. This can prove to be a waste of time and money for both the buyer and seller. Therefore, a balanced approach is advisable.


The specific contents of the LOI will vary depending on the nature and complexity of the deal. As noted above, from the seller's perspective the LOI should be as specific as possible, whereas the buyer will want to have less specificity. The following items are usually negotiated as part of the LOI:

  • the offer price or price range in dollar terms. Where the LOI contains a statement such as "the purchase price will be established as a multiple of 5x normalized EBITDA" it requires an interpretation of what adjustments should be made to determine "normalized EBITDA." As noted above, sellers prefer specificity while buyers will prefer generalization;
  • whether the offer is for the shares or assets of the company. When the offer is for the assets, the major assets to be acquired and liabilities to be assumed by the buyer should be set out. From the seller's perspective, it's also advisable to get an indication of how the aggregate purchase price will be allocated among the various asset classes acquired since such allocation can have a material impact on the tax consequences of the deal. The buyer will want to assign as much value as possible to depreciable capital assets in order to reduce their future tax liability. However, such an allocation has adverse tax consequences to the seller, who generally prefers that a significant portion of the purchase price be allocated to "goodwill", which is only 50% taxable in Canada;
  • the forms and terms of payment, including (where applicable):
    • the amount of cash paid on closing,
    • holdback amounts, and the conditions and timing for their release. Holdbacks in the order of 5% to 15% of the purchase price, for a period of 6 to 24 months are not unusual,
    • promissory notes, including the time period of payment, interest rate thereon, security and conditions for non-payment,
    • share exchanges, including any restrictions placed on the seller for liquidating the shares within a specified time period, and
  • earnouts or similar contingency-type arrangements, including specifics about performance metrics and duration. As a practical matter, earnout provisions are complex to document in the purchase agreement. Therefore, greater specificity in the LOI with respect to the provisions of the earnout will help to reduce legal costs;
  • the salient provisions of any management agreement or consulting contract with the seller, including the duration and basis of compensation (e.g. salary, performance incentives and employment benefits);
  • whether the offer is subject to financing, regulatory approval or other conditions. Where the offer is subject to financing, the seller will often be wary of the buyer's ability to raise the necessary capital and close the deal;
  • the length of time the buyer is afforded exclusivity to conduct their detailed due diligence and to negotiate the purchase agreement. This normally ranges from 60 to 120 days. As noted above, sellers prefer a shorter period, whereas buyers prefer a longer period. The parties can agree to extend the exclusivity period at a later date if the deal is moving along well;
  • significant balance sheet requirements such as target working capital, net worth and debt levels at the closing date. Balance sheet targets are not often specified in an LOI and sellers frequently find themselves faced with an unpleasant surprise just prior to closing;
  • significant income statement or cash flow requirements (if any), such as minimum levels of EBITDA and capital expenditures;
  • whether the buyer is required to make a deposit upon the execution of the LOI. As a practical matter, deposits in mid-market transactions are uncommon. Furthermore, it's costly and time consuming to construct an agreement governing the conditions for a deposit refund in the event that the transaction does not proceed;
  • responsibility for costs and break fees. Many buyers will insist that the seller agrees to compensate them for due diligence costs and legal expenses in the event that the seller subsequently elects not to proceed with the transaction on the terms agreed to in the LOI. Break fees are also common in the acquisition of public companies, given the "go-shop" provisions that allow the target company's board of directors to find a better offer, in order to fulfill their fiduciary duties;
  • any significant or unusual representations and warranties that the seller will be asked to agree to (e.g. those regarding environmental liabilities); and
  • the major terms of a non-competition and non-solicitation agreement that the seller and possibly certain key employees of the target company, will be asked to enter into.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on

Click to Login as an existing user or Register so you can print this article.

In association with
Related Video
Up-coming Events Search
Font Size:
Mondaq on Twitter
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
Email Address
Company Name
Confirm Password
Mondaq Topics -- Select your Interests
 Law Performance
 Law Practice
 Media & IT
 Real Estate
 Wealth Mgt
Asia Pacific
European Union
Latin America
Middle East
United States
Worldwide Updates
Check to state you have read and
agree to our Terms and Conditions

Terms & Conditions and Privacy Statement (the Website) is owned and managed by Mondaq Ltd and as a user you are granted a non-exclusive, revocable license to access the Website under its terms and conditions of use. Your use of the Website constitutes your agreement to the following terms and conditions of use. Mondaq Ltd may terminate your use of the Website if you are in breach of these terms and conditions or if Mondaq Ltd decides to terminate your license of use for whatever reason.

Use of

You may use the Website but are required to register as a user if you wish to read the full text of the content and articles available (the Content). You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these terms & conditions or with the prior written consent of Mondaq Ltd. You may not use electronic or other means to extract details or information about’s content, users or contributors in order to offer them any services or products which compete directly or indirectly with Mondaq Ltd’s services and products.


Mondaq Ltd and/or its respective suppliers make no representations about the suitability of the information contained in the documents and related graphics published on this server for any purpose. All such documents and related graphics are provided "as is" without warranty of any kind. Mondaq Ltd and/or its respective suppliers hereby disclaim all warranties and conditions with regard to this information, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. In no event shall Mondaq Ltd and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use or performance of information available from this server.

The documents and related graphics published on this server could include technical inaccuracies or typographical errors. Changes are periodically added to the information herein. Mondaq Ltd and/or its respective suppliers may make improvements and/or changes in the product(s) and/or the program(s) described herein at any time.


Mondaq Ltd requires you to register and provide information that personally identifies you, including what sort of information you are interested in, for three primary purposes:

  • To allow you to personalize the Mondaq websites you are visiting.
  • To enable features such as password reminder, newsletter alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our information providers who provide information free for your use.

Mondaq (and its affiliate sites) do not sell or provide your details to third parties other than information providers. The reason we provide our information providers with this information is so that they can measure the response their articles are receiving and provide you with information about their products and services.

If you do not want us to provide your name and email address you may opt out by clicking here .

If you do not wish to receive any future announcements of products and services offered by Mondaq by clicking here .

Information Collection and Use

We require site users to register with Mondaq (and its affiliate sites) to view the free information on the site. We also collect information from our users at several different points on the websites: this is so that we can customise the sites according to individual usage, provide 'session-aware' functionality, and ensure that content is acquired and developed appropriately. This gives us an overall picture of our user profiles, which in turn shows to our Editorial Contributors the type of person they are reaching by posting articles on Mondaq (and its affiliate sites) – meaning more free content for registered users.

We are only able to provide the material on the Mondaq (and its affiliate sites) site free to site visitors because we can pass on information about the pages that users are viewing and the personal information users provide to us (e.g. email addresses) to reputable contributing firms such as law firms who author those pages. We do not sell or rent information to anyone else other than the authors of those pages, who may change from time to time. Should you wish us not to disclose your details to any of these parties, please tick the box above or tick the box marked "Opt out of Registration Information Disclosure" on the Your Profile page. We and our author organisations may only contact you via email or other means if you allow us to do so. Users can opt out of contact when they register on the site, or send an email to with “no disclosure” in the subject heading

Mondaq News Alerts

In order to receive Mondaq News Alerts, users have to complete a separate registration form. This is a personalised service where users choose regions and topics of interest and we send it only to those users who have requested it. Users can stop receiving these Alerts by going to the Mondaq News Alerts page and deselecting all interest areas. In the same way users can amend their personal preferences to add or remove subject areas.


A cookie is a small text file written to a user’s hard drive that contains an identifying user number. The cookies do not contain any personal information about users. We use the cookie so users do not have to log in every time they use the service and the cookie will automatically expire if you do not visit the Mondaq website (or its affiliate sites) for 12 months. We also use the cookie to personalise a user's experience of the site (for example to show information specific to a user's region). As the Mondaq sites are fully personalised and cookies are essential to its core technology the site will function unpredictably with browsers that do not support cookies - or where cookies are disabled (in these circumstances we advise you to attempt to locate the information you require elsewhere on the web). However if you are concerned about the presence of a Mondaq cookie on your machine you can also choose to expire the cookie immediately (remove it) by selecting the 'Log Off' menu option as the last thing you do when you use the site.

Some of our business partners may use cookies on our site (for example, advertisers). However, we have no access to or control over these cookies and we are not aware of any at present that do so.

Log Files

We use IP addresses to analyse trends, administer the site, track movement, and gather broad demographic information for aggregate use. IP addresses are not linked to personally identifiable information.


This web site contains links to other sites. Please be aware that Mondaq (or its affiliate sites) are not responsible for the privacy practices of such other sites. We encourage our users to be aware when they leave our site and to read the privacy statements of these third party sites. This privacy statement applies solely to information collected by this Web site.

Surveys & Contests

From time-to-time our site requests information from users via surveys or contests. Participation in these surveys or contests is completely voluntary and the user therefore has a choice whether or not to disclose any information requested. Information requested may include contact information (such as name and delivery address), and demographic information (such as postcode, age level). Contact information will be used to notify the winners and award prizes. Survey information will be used for purposes of monitoring or improving the functionality of the site.


If a user elects to use our referral service for informing a friend about our site, we ask them for the friend’s name and email address. Mondaq stores this information and may contact the friend to invite them to register with Mondaq, but they will not be contacted more than once. The friend may contact Mondaq to request the removal of this information from our database.


This website takes every reasonable precaution to protect our users’ information. When users submit sensitive information via the website, your information is protected using firewalls and other security technology. If you have any questions about the security at our website, you can send an email to

Correcting/Updating Personal Information

If a user’s personally identifiable information changes (such as postcode), or if a user no longer desires our service, we will endeavour to provide a way to correct, update or remove that user’s personal data provided to us. This can usually be done at the “Your Profile” page or by sending an email to

Notification of Changes

If we decide to change our Terms & Conditions or Privacy Policy, we will post those changes on our site so our users are always aware of what information we collect, how we use it, and under what circumstances, if any, we disclose it. If at any point we decide to use personally identifiable information in a manner different from that stated at the time it was collected, we will notify users by way of an email. Users will have a choice as to whether or not we use their information in this different manner. We will use information in accordance with the privacy policy under which the information was collected.

How to contact Mondaq

You can contact us with comments or queries at

If for some reason you believe Mondaq Ltd. has not adhered to these principles, please notify us by e-mail at and we will use commercially reasonable efforts to determine and correct the problem promptly.