The letter of intent sets the frame for everything that follows. Here are the terms worth holding firm on before signing, and the Canadian rules that make each one matter.
Key takeaways
STEP 01 OF 10
An exclusivity period with no end date is the single most seller-unfavourable term that regularly gets signed without objection. Tie it to a fixed number of days, not to “completion of due diligence” — a buyer who controls the pace of diligence controls the pace of the exclusivity too, and an open clock is a free option on the seller’s business with no corresponding commitment.
Thirty to forty-five days is a reasonable opening position for a lower-middle-market deal; sixty or more should come with a stated reason — financing that genuinely takes that long, or a regulatory step outside anyone’s control such as a Competition Act filing. If the buyer needs longer, make the extension conditional on specific diligence milestones being cleared, not simply on the calendar running out.
STEP 02 OF 10
A break fee is worth asking for, and worth being honest about what it actually deters. A fee payable only if the buyer walks without cause after a defined diligence period has passed puts a real cost on wasting the seller’s exclusivity window; a fee limited to expense reimbursement does very little beyond covering legal bills already spent.
Reciprocity matters here too: if the seller is expected to compensate the buyer for diligence costs on a walk-away, the same logic should run the other way if the seller accepts a competing offer during exclusivity. An LOI that only obligates one side to pay for changing its mind is not a balanced starting point, whichever side proposed it.
STEP 03 OF 10
Most of an LOI’s substantive price and structure terms are deliberately non-binding — that is the point of the document, and trying to make them binding usually just slows the process down without adding real protection. What should bind immediately, in writing, is confidentiality, exclusivity, the break-fee mechanic if any, governing law, and each party’s own cost allocation.
Read the LOI clause by clause rather than trusting a general “except as otherwise noted” framing at the top — a document that says it is “generally non-binding” but buries a binding no-shop three pages later is common, and the binding clauses are exactly the ones worth negotiating hardest, since the price terms will get revisited anyway.
STEP 04 OF 10
Decide, before the LOI is drafted, whether any deferred portion of the price is a fixed amount paid over time or a payment that depends on how the business performs after closing — the two are taxed completely differently. A fixed price paid in instalments can use the reserve mechanism in ITA s. 40(1)(a)(iii), spreading the taxable gain over up to five years ITA s. 40.
A payment that depends on a post-closing metric — revenue, EBITDA, a client-retention test — is not a capital gain at all when it lands; ITA s. 12(1)(g) includes in income “any amount received…that was dependent on the use of or production from property, whether or not that amount was an instalment of the sale price” ITA s. 12(1)(g), taxed as ordinary income in the year received, with no reserve available. A vendor take-back in the Canadian lower-middle market commonly runs 10–20% of price over three to five years; see designing an earn-out that survives the first year for the drafting detail once this distinction is settled.
STEP 05 OF 10
Even a one-line reference to a net working capital target in the LOI saves a fight later. Buyers routinely propose a peg calculated on a trailing average that happens to fall on a low month for the business, and a seller who has not flagged the concept at LOI stage has little leverage to push back once the definitive agreement is being drafted against a tight timeline.
It does not need precision this early — a stated intention to peg working capital to a normalized trailing twelve-month average, with true-up mechanics to be agreed, is enough to put the issue on the table before it becomes a late-stage argument dressed up as a technicality.
STEP 06 OF 10
A promise in the LOI to retain the team is a business commitment layered on top of, not a substitute for, statutory continuity. In Ontario, service with the seller “flows through” to the buyer automatically once an employee continues working for the business after the sale per Ontario’s ESA guide, and British Columbia goes further: continuity is deemed automatically and expressly survives even a receivership BC ESA s. 97.
What the LOI actually adds, then, is a commitment the statute does not require — a stay-bonus pool for named individuals, or a stated intention not to restructure roles in the first period after closing. Write that commitment specifically rather than as a vague “no material changes” promise that neither side can enforce.
STEP 07 OF 10
If the seller is expected to sign a personal non-compete as part of the deal, check which jurisdiction governs it before assuming it is enforceable. Ontario has banned employee non-compete agreements since 25 October 2021, with a narrow exception only where “there is a sale or lease of a business…operated as a sole proprietorship or a partnership” and the seller becomes an employee of the purchaser per Ontario’s ESA guide — as written, that exception does not name a corporation, the ordinary shape of a share sale.
A restrictive covenant given in a genuine sale of a business, separate from any employment relationship, still has a route to enforceability through the Competition Act’s ancillary-restraints defence Competition Act s. 45(4) — keep the non-compete tied to the sale agreement itself, reasonably scoped in time and geography, rather than folding it into an employment contract where the ESA ban may bite.
STEP 08 OF 10
Set boundaries in the LOI on what gets shared and when, rather than leaving diligence scope to be negotiated informally once exclusivity has already been granted. A sequenced plan — financial statements first, then contracts and the minute book, then direct management access — protects the seller’s negotiating position and, in practice, keeps the buyer focused on what actually matters the sequencing a standard first-time-buyer diligence checklist recommends.
Name explicitly who inside the buyer’s organization is authorized to see the most sensitive material, and require any advisor with access to be bound by confidentiality obligations at least as protective as the NDA itself — a term worth writing once here rather than negotiating separately with each advisor who shows up later.
STEP 09 OF 10
If the buyer’s financing is a condition of closing, understand what that financing can and cannot cover before agreeing to the condition’s wording. The federal Canada Small Business Financing Program cannot finance a share purchase or an asset a holding company acquires ISED’s own FAQ confirms — so a financing condition drafted around CSBFP for a deal structured as a share sale is internally inconsistent, and worth flagging before it becomes a closing-day surprise.
Where the deal is genuinely an asset sale using CSBFP-eligible financing, the program caps the loan at $1.15 million, with no more than $500,000 of that available for equipment and leasehold improvements per the program’s own limits — numbers worth knowing before agreeing that a financing condition tied to CSBFP approval is a realistic path to closing a larger deal.
STEP 10 OF 10
Do not let governing law and dispute-resolution language default silently to whatever the buyer’s counsel happened to use in a template from a different deal. The province named in the LOI will govern mechanics that matter later — provincial sales tax treatment, employment standards continuity, and personal property registry searches all vary by province, sometimes sharply.
Confirm the deal’s actual jurisdiction matches where the target business operates, not simply where the buyer or its counsel is based. A mismatch is rarely fatal, but it adds a second province’s rules to track for no commercial reason.
The test is simple to state and easy to get wrong under deal pressure: if the amount owed is fixed on the day of closing and only the timing of payment is uncertain, it is a vendor take-back note, eligible for the s. 40 reserve. If the amount owed depends on how the business performs after closing, it is an earn-out under s. 12(1)(g), taxed as ordinary income when received, with no reserve available regardless of how long the payment term runs.
An LOI that blends the two into a single ambiguous “deferred consideration” clause creates a genuine tax risk, not just a drafting inconvenience — the CRA looks at what was actually promised, not the label the parties chose. Decide which mechanic is intended before the term sheet goes to counsel, and draft the LOI’s deferred-payment language to match it.
Sellers negotiating their first LOI often drop the break fee to keep the buyer comfortable, on the theory that a motivated buyer will not walk anyway. That logic runs backwards — a break fee protects the seller precisely in the scenario where the buyer turns out not to be motivated enough to close, after the exclusivity period has already cost the seller other options.
It does not need to be large to be effective. A fee that covers the seller’s actual legal and accounting costs incurred during the exclusivity window is defensible to almost any buyer, and removing it entirely should be treated as a genuine concession, not a formality — see handling a single unsolicited approach for how the same exclusivity dynamic plays out before an LOI even exists.
Yes, in the ordinary Canadian LOI — price and structure terms are typically stated as non-binding precisely so that diligence findings can adjust them. What binds immediately is confidentiality, exclusivity and the break-fee mechanic; treat the price as a strong indication, not a locked number.
Not automatically — a buyer with a genuine, longer diligence need, such as a regulated industry or a Competition Act filing, may reasonably need more time. The problem is an open-ended clock with no milestones attached, not length on its own.
A target date is useful discipline even though it will likely move. Naming one, with a mechanism to extend by mutual agreement rather than unilaterally, keeps both sides honest about the pace of diligence without locking in a date neither side can actually hit.
Build a walk-away date into the financing condition itself, after which either side can terminate without penalty. An open-ended financing condition with no outside date effectively hands the buyer indefinite, cost-free optionality over the seller’s business.
A 30-minute call is enough to tell you whether AI pays for itself here.
Nobody publishes Canadian transaction data, so every valuation in this country quotes an American benchmark. We are building the Canadian one — multiples, asking-to-sale spreads and days on market, by sector and by city. Leave an email and you will see it first.
No pitch, no listings. One email when the first report lands.
