A letter of intent (LOI) sets out the price, structure and key terms a buyer and seller have agreed to pursue and grants the buyer a period of exclusivity to complete diligence — and while its commercial terms are usually stated as non-binding until a definitive agreement is signed, specific clauses inside the same document are often enforceable on their own.
treadstonelaw.ca states the split plainly: “some LOIs are partially binding — certain provisions (such as confidentiality obligations, exclusivity provisions, or a commitment to negotiate in good faith) may be enforceable even if the main transaction terms are expressed as non-binding until a final agreement is signed.” The price and deal structure are usually the part left non-binding; the confidentiality and no-shop clauses are usually the part that is not.
How the LOI structures payment also decides how much of a seller’s gain can be deferred for tax purposes. Where the price includes an earn-out or a deferred vendor take-back, Income Tax Act s. 40(1)(a)(iii) caps the reserve that spreads a capital gain over future years at a maximum five-year spread on an ordinary arm’s-length sale — a term the LOI is already fixing before the definitive agreement is drafted. The source is blunt about the risk of getting the drafting wrong: “ambiguous language leads to disputes; have a lawyer review any LOI before signing.” (treadstonelaw.ca)
An independent sponsor and a family-owned HVAC business sign an LOI at $11.5 million enterprise value with 90 days of exclusivity: the price is expressly non-binding, but the confidentiality clause and a 90-day no-shop are not. During diligence, the buyer’s quality of earnings report finds normalized EBITDA lower than the seller represented, and the buyer renegotiates the price down to $10.2 million before signing the definitive share purchase agreement. That renegotiation is only possible because the price term was expressly non-binding — and it is the binding no-shop clause that stopped the seller from taking the original number to another buyer instead.
See also: Indication of interest (IOI) · Non-disclosure agreement · Triaging inbound deal flow without missing the good ones.
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