Legally reviewed by Joseph Mayo, Principal Attorney (Ontario and New York).
Most buyers sign a letter of intent to purchase a business believing it is a handshake on paper. Most sellers sign believing the same thing. Both are usually wrong about at least one clause, and the clause they are wrong about is rarely the price.
A letter of intent sets out the shape of a deal before anyone spends money on due diligence or definitive documents. It is short, it reads like a summary, and it almost always says somewhere that it is non-binding. That last part is where the trouble starts, because the sentence declaring the document non-binding sits alongside four or five provisions that are meant to bind, and courts in both New York and Ontario read the whole document rather than the label on it.
This guide covers what goes in the LOI, which provisions carry legal weight, what New York’s highest court has actually said about preliminary agreements, and which cross-border filings your closing date has to survive if the buyer and the business sit on opposite sides of the border.
Quick Answer
A letter of intent to purchase a business is a short preliminary document setting out price, structure and timing before definitive agreements are drafted. Most of it is non-binding, but confidentiality, exclusivity, expense allocation, governing law and dispute resolution normally do bind. Courts read the text, not the label.
What is a letter of intent to purchase a business?
A letter of intent, often shortened to LOI and sometimes called a term sheet or heads of agreement, is the document that converts a conversation into a deal outline. It comes after the parties have exchanged enough information to be serious and before the lawyers begin drafting the purchase agreement.
The LOI does three jobs at once.
It records the commercial terms the parties think they have agreed, so that neither side spends the next two months negotiating from a different understanding of the price. It sets a process and a calendar, including how long due diligence runs and when the parties aim to close. And it creates a small set of genuinely enforceable obligations, usually around confidentiality and exclusivity, that protect each side while the rest of the deal is being worked out.
What the LOI is not is a purchase agreement. It has no representations and warranties worth the name, no indemnity, no closing mechanics and no allocation of risk between signing and closing. Those live in the definitive document, which for a share deal is typically a stock purchase agreement and for an asset deal an asset purchase agreement.
In venture financing the equivalent document is the term sheet, and the drafting conventions are close enough that founders often recognise the structure from an NVCA term sheet. The commercial content differs, but the binding and non-binding split works the same way.
Which parts of an LOI are binding and which are not?
The honest answer is that it depends entirely on how the document is drafted, which is why the generic templates that dominate search results for this topic are a poor substitute for a document written for your deal.
That said, there is a conventional split, and it is worth knowing before you negotiate.
Normally intended to bind:
- Confidentiality. Often the LOI incorporates an earlier non-disclosure agreement by reference, or restates it. Either way, the seller is handing over financial records, customer lists and supplier terms, and wants that protected whether or not the deal closes. Our guide to what privileged and confidential actually protects covers where those obligations start and stop.
- Exclusivity, also called a no-shop. The seller agrees not to solicit or negotiate with other buyers for a defined window.
- Expense allocation. Who pays for what if the deal dies. Usually each side bears its own costs, but break fees appear in larger deals.
- Governing law and dispute resolution. Which law applies and where a fight gets resolved. In a cross-border deal this is not boilerplate, and a badly drafted forum selection clause can be the difference between a manageable dispute and an unmanageable one.
- Access and cooperation. The seller’s commitment to give the buyer’s advisers access to records, premises and management.
Normally not intended to bind:
- Purchase price and the payment structure
- Deal structure, meaning share purchase or asset purchase
- Conditions to closing
- The target closing date
- Employment and transition arrangements for the seller
- Anything described as subject to satisfactory due diligence
The critical drafting point is that this split does not happen by itself. A well-drafted LOI states explicitly which numbered paragraphs bind and which do not, and says that the non-binding paragraphs create no obligation to negotiate or complete. A poorly drafted one says “this letter is non-binding” in the final paragraph and leaves a judge to work out what the parties meant.
What does New York law say about whether an LOI binds?
New York’s highest court addressed preliminary agreements directly in IDT Corp. v Tyco Group, S.A.R.L., 13 N.Y.3d 209 (2009). The parties had a valid settlement agreement, but it contemplated the later execution of “definitive agreements” that were never executed. The Court of Appeals held the obligation never became enforceable, because completing those further agreements was a condition precedent to performance.
The test the Court applied asks “whether the agreement contemplated the negotiation of later agreements and if the consummation of those agreements was a precondition to a party’s performance” (IDT, 13 N.Y.3d 209).
Two points matter for anyone drafting an LOI in New York.
First, IDT declined to adopt the Type I and Type II labels used in the federal preliminary-agreement cases decided under New York law. Those categories are widely quoted in commentary, but the state’s highest court did not take them up, and a document drafted around the federal taxonomy is not automatically drafted around what a New York state court will apply.
Second, IDT found the agreement unenforceable, which cuts in the buyer’s favour in that case but should not be read as a rule that preliminary documents never bind. The opposite proposition has its own authority. In Brown Bros. Elec. Contrs. v Beam Constr. Corp., 41 N.Y.2d 397 (1977), the Court of Appeals confirmed that a binding contract can exist without a signed formal instrument, and that courts look to the parties’ objective conduct. The Court found “the course of conduct between [the owner] and Brown, including their writings . . . was sufficient to spell out a binding contract” (41 N.Y.2d at 399).
Put those together and the practical rule is uncomfortable but simple. A New York court will read what the document says and watch what the parties did. Writing “non-binding” at the bottom of a letter whose terms and subsequent conduct look like agreement is not a reliable defence, and an entire agreement clause drafted into the eventual purchase agreement does different work than the disclaimer in the LOI.
How do Ontario and New York differ at the LOI stage?
On contract formation, less than buyers expect. Ontario courts, like New York courts, look to the objective intention of the parties as expressed in the document and their conduct, rather than to a label. The drafting discipline is the same on both sides of the border: say which paragraphs bind, say which do not, and do not behave as though the deal is done before it is.
A note on authority. There is an Ontario Court of Appeal decision frequently cited for the proposition that a letter of intent can be binding on its wording. We have deliberately not cited it here, because the official reporting source could not be opened during the preparation of this article and this firm does not cite authority it has not read. If that point is load-bearing for your transaction, ask your counsel to pull the decision itself rather than relying on a summary.
Where the two jurisdictions genuinely diverge is in the statutory machinery that a closing has to clear, and that divergence belongs in the LOI’s timetable rather than in its legal-effect clause.
Bulk sales. New York still runs a bulk sale regime for sales tax purposes. A purchaser must notify the Tax Department by filing Form AU-196.10 “at least 10 days before paying for or taking possession of any business assets, whichever happens first,” and a purchaser who pays the seller without doing so “may be held liable” for the seller’s unpaid sales and use taxes (New York State Department of Taxation and Finance, Tax Bulletin ST-70, updated June 17, 2025; Tax Law §§ 1134(a)(1), 1138(a)(3)(A), 1141(c)). That liability is capped at the purchase price or the fair market value of the assets, whichever is greater, which is small comfort on a business bought for its cash flow.
Ontario has no equivalent. The Bulk Sales Act, R.S.O. 1990, c. B.14 was repealed on March 22, 2017 by the Burden Reduction Act, 2017, S.O. 2017, c. 2, Schedule 3, section 1, whose operative provision reads in full: “The Bulk Sales Act is repealed.” A US buyer whose counsel expects an Ontario bulk sales clearance is looking for a filing that has not existed for more than nine years.
Sales tax on the transaction itself. On a Canadian asset purchase, the supplier and the recipient can jointly elect under section 167(1) of the Excise Tax Act so that no GST/HST is payable on the sale, where the recipient acquires “all or substantially all of the property that can reasonably be regarded as being necessary for the recipient to be capable of carrying on the business or part as a business.” The election is made on Form GST44. The Canada Revenue Agency reads “all or substantially all” as “generally 90% or more” (GST/HST Memorandum 14-4). The election is not available where the supplier is a registrant and the recipient is not, which is a real trap for a newly formed US-owned buyer that has not yet registered.
Purchase price allocation in the US. Where a group of assets constituting a trade or business changes hands, “both the purchaser and seller must file Form 8594 and attach it to their income tax returns” (IRS, Instructions for Form 8594, Rev. November 2021). Buyer and seller allocate the price across asset classes, and they are expected to allocate it consistently. That allocation is a negotiation with real tax consequences for both sides, and the LOI is the right place to raise it, not the closing table.
What cross-border filings should the LOI’s timetable account for?
If the buyer and the target are in different countries, the LOI’s proposed closing date is a guess until someone checks whether a regulator has to be told first. Two of these filings are threshold-based. One is not.
United States, competition. Under the Hart-Scott-Rodino regime, the size-of-transaction threshold for 2026 is USD 133.9 million, effective February 17, 2026 (Federal Trade Commission, Current Thresholds; 91 FR 2133). The FTC put it plainly: “For 2026, that threshold will be $133.9 million.” Filing fees start at USD 35,000 for reportable deals valued under USD 189.6 million. Section 7A(a)(2) of the Clayton Act requires the thresholds be revised annually based on the change in gross national product, so a deal signed in December against one year’s threshold can close under the next year’s.
Canada, competition. Pre-merger notification under the Competition Act is generally required where the target’s Canadian assets or revenues from those assets exceed CAD 93 million, and the combined Canadian assets or revenues of the parties and their affiliates exceed CAD 400 million (Competition Bureau, March 2, 2026). Note both are “exceed” rather than “meet or exceed,” and the CAD 93 million figure was held flat for 2026 rather than indexed upward.
Canada, foreign investment. This is the one that surprises US buyers. Under the Investment Canada Act, a net benefit review is triggered for a direct acquisition of control by a non-state-owned trade-agreement investor at CAD 2.179 billion in enterprise value for 2026, and the United States is a trade-agreement investor under the Canada-United States-Mexico Agreement (Innovation, Science and Economic Development Canada, Thresholds, modified January 26, 2026). For a WTO investor that is not a trade-agreement investor the 2026 figure is CAD 1.452 billion; for a WTO state-owned enterprise it is CAD 578 million in asset value; for non-WTO investors the statutory thresholds are CAD 5 million for direct and CAD 50 million for indirect acquisitions.
Almost no SME deal reaches those numbers, and that is exactly why buyers get this wrong. Being below the review threshold does not mean there is no filing. Section 11 of the Investment Canada Act makes an investment to acquire control of a Canadian business notifiable “unless the investment is reviewable pursuant to section 14,” and section 12 requires notice “at any time prior to the implementation of the investment or within thirty days thereafter.” Establishing a new Canadian business is notifiable on the same basis. So every non-Canadian acquisition of control of a Canadian business produces a mandatory federal filing: a notification below the threshold, an application for review above it.
Separately, the Act “allows the federal government to conduct a national security review of any foreign investment, regardless of its value and whether it is subject to the mandatory filing requirements of the Act” (ISED). There is no floor on that one.
United States, foreign investment. CFIUS “is an interagency committee authorized to review certain transactions involving foreign investment in the United States” (US Department of the Treasury). The process is largely voluntary, with mandatory declarations in defined cases, including certain critical-technology transactions and acquisitions of a substantial interest by a foreign government under 31 C.F.R. § 800.401. Notice filing fees run from USD 0 to USD 300,000 depending on transaction value under the schedule adopted in 2020 and still in force; declarations carry no fee. A Canadian buyer of a US business should have this screened before the LOI fixes a closing date, not after.
What belongs in the LOI: a clause-by-clause checklist
| Clause | What it should say | Binding? |
|---|---|---|
| Parties and target | Exact legal names of buyer, seller and the business, plus what is being bought | No |
| Structure | Share purchase or asset purchase, and which entity signs | No |
| Purchase price | The number, the currency, and whether it assumes cash-free and debt-free | No |
| Payment terms | Cash at closing, holdback, earn-out, vendor take-back note | No |
| Working capital | That a target level will be set and how it will be measured | No |
| Deposit or escrow | Amount, who holds it, and the conditions for its return | Usually yes |
| Due diligence | Scope and a defined period with a start trigger | No |
| Confidentiality | Restated or incorporating the earlier NDA | Yes |
| Exclusivity | Length, what the seller cannot do, and what happens on breach | Yes |
| Conditions | Financing, landlord consent, regulatory filings, key-customer consents | No |
| Regulatory | Which filings the parties expect and who prepares them | No |
| Employees | Treatment of staff and any transition or consulting role for the seller | No |
| Non-compete | That the definitive agreement will contain one, with rough scope | No |
| Expenses | Who bears costs if the deal does not close | Yes |
| Governing law and forum | Which law, which courts or which arbitral seat | Yes |
| Legal effect | Which numbered paragraphs bind and which do not, stated expressly | Yes |
| Termination | How and when the LOI expires | Yes |
The single most useful line in the whole document is the legal-effect paragraph, and it is the one most often copied unchanged from a template. Getting that paragraph right is the cheapest risk reduction available in the entire transaction, and it is the sort of thing a focused contract review catches in an hour.
How does exclusivity work, and what does it cost you?
Exclusivity is the provision the buyer wants most and the seller concedes most reluctantly, because it takes the seller’s leverage away for the duration.
A workable exclusivity clause needs four things. A defined period, measured from a date that has actually happened rather than from a future event. A precise description of what the seller cannot do, which should reach soliciting, entertaining, negotiating and providing information, not just signing. A carve-out for anything the seller is legally obliged to do. And a stated consequence for breach, which may be a fee, or may simply be that the buyer’s remedies at law survive.
For the buyer the calculus is straightforward. Diligence on an operating business means accountants, lawyers and sometimes an environmental or IT consultant, and that money is spent whether or not the deal closes. Exclusivity is what makes spending it rational.
For the seller the calculus is about the length of the window. A period long enough to complete genuine diligence is reasonable. A period long enough that the seller’s alternatives go cold while the buyer decides whether it is actually interested is not, and a seller who has agreed to one has effectively given a free option. Sellers should tie the clock to the buyer’s performance, so that the exclusivity falls away if the buyer misses a milestone.
Neither side should agree to automatic renewal of exclusivity. If the period needs extending, that should be a decision, not a default.
How does the LOI become a definitive purchase agreement?
The LOI is signed, and then four things run in parallel rather than in sequence.
Due diligence starts, and it is where the price set in the LOI either holds or moves. Legal, financial, tax, and depending on the business, environmental, IP and employment. Findings that matter get reflected either in a price adjustment, a specific indemnity, or a condition to closing.
Drafting begins on the definitive agreement, usually prepared by the buyer’s counsel. This is where representations and warranties, indemnification, and the allocation of risk between signing and closing get negotiated, and where the limitations of liability that cap the seller’s exposure are fought over. A share deal produces a share or stock purchase agreement; an asset deal produces an asset purchase agreement plus the conveyancing documents that actually move each asset.
Third-party consents get chased. Landlords, lenders, franchisors, key customers and licensors. These take longer than anyone budgets and are the most common reason a closing date slips.
Regulatory filings get prepared, on the analysis described above.
The LOI’s non-binding terms have no independent life after this point. They are either carried into the definitive agreement or they are gone. The binding terms, particularly confidentiality, usually survive by their own wording, and a well-drafted LOI says so.
What do buyers and sellers get wrong at the LOI stage?
Treating it as a formality. The terms agreed in the LOI set the anchor for everything that follows. Renegotiating a price or a structure after the LOI is signed is possible, but it costs credibility and it is the point at which deals most often break down.
Signing before the buyer is genuinely ready. An LOI signed to hold a position, before financing is arranged or the buyer has decided what it actually wants, buys exclusivity the buyer cannot use and burns the seller’s goodwill.
Leaving the structure open. Share purchase and asset purchase produce different tax outcomes, different liability transfers and different consent requirements. Leaving “structure to be determined” in the LOI defers a decision that changes the price.
Using a template legal-effect paragraph. Discussed above, and worth repeating, because it is the clause that turns a comfortable assumption into litigation.
Forgetting that the buyer may not exist yet. Cross-border buyers frequently incorporate an acquisition vehicle after signing the LOI. Whether the LOI is signed by the individual, an existing company, or a company to be formed, and whether it can be assigned to the eventual acquirer, needs to be decided in the document rather than assumed. Buyers structuring a first entity on the other side of the border should read our guide to starting a business in both Canada and the US.
Ignoring immigration where it matters. Where the buyer intends to move to the United States and run the business, the purchase structure and the visa file interact, and the LOI’s conditions are part of that picture. What qualifies is narrower than most buyers assume, as our guide to buying an E-2 visa business for sale sets out.
Frequently asked questions
Is a letter of intent to purchase a business legally binding?
Partly, and the split is deliberate. Most LOIs are drafted so that the commercial terms are non-binding while confidentiality, exclusivity, expense allocation, governing law and termination do bind. Courts in New York look at the whole document and the parties’ conduct rather than the label, so a document that says “non-binding” but reads like an agreement can still create obligations.
Can a seller accept another offer after signing an LOI?
Only if the LOI has no exclusivity clause, or if the exclusivity period has expired or been triggered off by the buyer’s own failure to perform. Where a no-shop is in force, soliciting or negotiating with another buyer breaches a binding term. The remedy depends on the drafting, which is why the consequence of breach should be stated rather than left to implication.
How long should exclusivity last in a business purchase LOI?
Long enough to complete genuine due diligence and no longer. The right period depends on the complexity of the business, how clean its records are, whether third-party consents are needed and whether a regulatory filing is in play. Sellers should resist automatic renewal and should tie the period to the buyer meeting defined milestones.
Do I need a lawyer to write a letter of intent?
The commercial terms you can draft yourself. The legal-effect paragraph, the exclusivity clause and the governing law provision are where the enforceable obligations sit, and those are worth having drafted or reviewed. Template LOIs downloaded online are written for no jurisdiction in particular and typically handle the binding and non-binding split poorly.
What is the difference between a letter of intent and a purchase agreement?
The LOI outlines the deal and binds the parties on a handful of process points. The purchase agreement is the operative contract: it contains the representations and warranties, the indemnities, the conditions to closing, the closing mechanics and the remedies. The LOI’s non-binding terms have no effect once the definitive agreement is signed.
Does buying a Canadian business require a government filing?
Yes, if the buyer is not Canadian. Section 11 of the Investment Canada Act makes an acquisition of control notifiable unless it is reviewable, and section 12 allows notice to be given any time before implementation or within thirty days afterwards. Above the applicable review threshold, an application for review replaces the notification. A national security review is possible at any transaction value.
Should the LOI include a deposit?
It can, and in smaller deals it often does, as evidence the buyer is serious. If it does, the LOI needs to say who holds the deposit, on what terms, and in exactly which circumstances it is returned or forfeited. A deposit provision is almost always a binding provision even where the rest of the document is not, so it belongs in the binding list in the legal-effect paragraph.
What happens if due diligence turns up a problem after the LOI is signed?
That is what due diligence is for, and the LOI’s non-binding price is what gives the buyer room to respond. Depending on severity, the buyer can seek a price reduction, a specific indemnity in the purchase agreement, a holdback against the risk, a condition requiring the issue be fixed before closing, or can walk. A well-drafted LOI makes clear that the buyer’s continued participation is subject to diligence being satisfactory to it.
Conclusion
A letter of intent to purchase a business is worth more attention than its length suggests. It fixes the commercial anchor for the rest of the deal, it creates a small number of obligations that are fully enforceable, and in a cross-border transaction its timetable has to survive filings that neither party may have thought about when they agreed a closing date.
The document itself is short. The drafting decisions inside it are not, and the ones that matter most are the ones that look like boilerplate.
How Mayo Law Can Help
Mayo Law is a cross-border firm with offices in Toronto and New York. Joseph Mayo is licensed in both Ontario and New York, which means a single file can cover the Ontario corporate side and the New York side of a transaction without handing the deal between two firms that each see half of it.
On a business purchase, that usually means drafting or reviewing the letter of intent with the binding provisions written deliberately, advising on share versus asset structure and its tax consequences on both sides of the border, identifying which regulatory filings the timetable has to account for, and carrying the deal through the definitive agreement to closing. We also act as ongoing counsel afterwards, through our international business practice.
If you are negotiating a purchase and want the LOI looked at before it is signed, get in touch.
Disclaimer
This article is for general information only and is not legal advice. Reading it does not create a solicitor-client or attorney-client relationship. Statutes, regulations, thresholds and government fees change, and the figures given here carry the dates on which they were verified. You should obtain advice on your own circumstances before acting. Legal services are provided by Mayo Law PC in Ontario and by Joseph Mayo PLLC in New York.
