How to draft a letter of intent in Ontario for M&As, company sales, and more!

In the world of business transactions, everything has to be black and white, or rather, put on paper. An embodiment of this is when a party submits a letter of intent to another for a certain transaction.

Whether your law firm is doing a letter of intent for your client, or your law firm needs a letter of intent for its own business transaction itself, this article is for you. We'll break down these letters and its basics to help you draft a perfect one.

What is a letter of intent?

A letter of intent (LOI) is a legal document that records the main terms the parties have agreed on at the start of the deal. It shows that they are serious about working toward a final, legally binding agreement, while they're working on a draft for a more formal agreement.

In general business deals, an LOI is usually the first formal document that a buyer and seller exchanges. It sets out the basic terms for a proposed sale or acquisition, such as the:

• structure of the deal
• purchase price
• payment terms
• key closing conditions

However, it does not try to cover every detail that will appear later in the final contract or agreement. This is why some of its terms are non-binding, while parties can also stipulate the binding terms that must be recognized until the deal closes.

This video explains more about letters of intent used in business transactions:

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Purposes of a letter of intent

LOIs serve many purposes for business transactions that your client or your law firm enters:

• A formal expression of interest: An LOI helps create a shared understanding of the deal and each side's main responsibilities at an early stage. As such, it is a pre‑contract that shows the parties plan to enter a binding agreement later, once they complete the due diligence and drafting.
• Sets the initial terms of the contract: An LOI also outlines the preliminary terms and conditions that the parties intend to use as the basis for the final contract. Parties can also dictate what terms in the LOI are binding until the final contract is signed, and what terms may be changed later.
• Align the expectations of parties early on: The LOI lets the parties outline how they see the proposed transaction and check that they are on the same page before they spend time and money on full negotiations and drafting. It also helps spot deal‑breakers or major issues at the start.
• Legally protects the business transaction: Parties often use an LOI to set binding terms and immediate legal protection while they continue to negotiate the transaction. For example, the LOI can stop a seller from shopping the deal during a set period, protect sensitive information, and deal with due diligence costs if the transaction does not move ahead.

In all of these, an LOI is an assurance that one party is interested in the transaction, and that the other is willing to accept this party. This secures the transaction between the two parties until a certain time.

When is a letter of intent usually used?

LOIs are widely used in a wide range of transactions, that are not only for commercial purposes, but also for personal reasons. Below are some of the most common uses of LOIs.

Letter of intent in real estate transactions

In commercial real estate, an LOI can serve as a preliminary agreement for the sale of a single property. It may include the following basic property terms:

• a property description
• the purchase price
• an earnest money deposit
• the period for due diligence on the property

The goal is to agree on these fundamentals before the parties spend time and money on a full contract before the full agreement is drafted.

For instance, when your client is buying a development property, they would enter an LOI, send an offer to purchase, or make a contract of purchase and sale. This usually comes after the preliminary negotiation.

Letter of intent for study permits

If you're an immigration lawyer, you may be handling cases where you help foreigners get their study permits. This is also one area where a letter of intent or explanation is used; while it is not required to submit one, it is still highly recommended to do so.

Learn more about drafting a letter of intent for a study permit in Canada with this video:

More resources to help Ontario lawyers can be found in our Professional Regulation page, which has updates from the law society and other related regulatory rules.

Letter of intent in private company sales

In private company sales, such as in company mergers and acquisitions (M&As) and partnerships, the LOI is often the first formal document that a buyer and seller exchanges. In M&As, an LOI comes in the picture during negotiations between the acquiring company and the potential target company.

In these cases, LOIs serve the following purposes:

• records the broad commercial terms for the proposed sale or acquisition of a privately held business or company
• sets the framework in conducting the due diligence process and for the definitive share or asset purchase agreement
• address relevant matters or issues in the early stages of the transaction, such as the impact of tariffs for cross-border M&As

M&A and deal lawyers also use an LOI at the start of share transactions, before they draft a definitive share purchase agreement or launch a full due diligence. The LOI is then signed by both parties while the other stages of the M&A push forward.

What are the key terms that a letter of intent should cover?

While the exact mix depends on the type of transaction, there are some common key terms that LOIs should address. First, it focuses on the main business terms, and next, it adds the other terms that will protect how the deal will move forward.

Essential commercial terms

Since LOIs are used in commercial transactions that your clients or your law firm enters, here are some of the core commercial terms that it must contain:

• How the deal will be structured: In M&As, the LOI must state whether the parties are planning a share purchase or an asset purchase. Buyers may favour an asset deal to help contain liabilities, while sellers often prefer a share sale for tax reasons. This choice should appear early in the LOI, so that both sides work from the same M&A structure.
• All about the price and other money matters: The LOI should cover the purchase price and how it will be calculated. That can include a fixed price, price adjustments, or deferred elements such as holdbacks and earn‑outs. The LOI can also explain when and how the price will be paid, and whether payment will be in cash, shares, or a mix of these two.
• Terms on non‑competition and transition support: The LOI may outline how long the seller will be restricted from competing and what role, if any, the seller will have after closing to help with handover and continuity. This is important in M&As and in partnerships, since it prevents the dilution of the market as the new entity pursues its own business.

As any other contract, an LOI can be modified to answer current issues, while troubleshooting future problems that the parties may encounter along the way.

Binding and non-binding terms of a letter of intent

The LOI should also say which parts are binding and which are not. Here are some examples of what are binding and non-binding terms in most business deals:

• binding terms:
  • exclusivity
  • confidentiality
  • rules on disputes
  • expense reimbursement
• non‑binding terms:
  • deal structure
  • purchase price

In some cases, an LOI can be drafted as a binding agreement in whole or in part, depending on the wording and the parties' intent. It can then support enforceability of these binding and non-binding terms because they are clearly identified in one place. Clear wording can also help avoid disputes later about whether one side was "locked in" at the LOI stage.

Other process and protective terms

Apart from the main commercial points, an LOI often includes process terms that protect the negotiations itself. Many of these are meant to be binding from the moment the LOI is signed, even if the deal terms stay non‑binding.

These common process terms include the following:

• exclusivity or no‑shop period: seller agrees not to negotiate with other buyers for a set time
• confidentiality: parties agree to keep the information about the deal private and among themselves
• expense or deposit terms: rules for deposits or reimbursement of due diligence costs if the deal does not close
• conditions to closing: the conditions that must be met before the closing and the final contract is signed
• timelines: dates and deadlines for due diligence, drafting, signing the definitive agreement, among others

These terms help keep all parties focused, reduce wasting their time, and protect both sides against some process risks.

Letter of intent: An important "pre-contract"

An LOI works best if it reflects how the parties actually plan to do business. When law firms treat the LOI as a serious first step, and not just a simple formality, it can reduce confusion and narrow down the issues that follow. That mindset lines up with how many firms already use LOIs to set up structure, price, timelines, and process terms before drafting the final, long-term agreements.

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