An LOI is designed to be easy to leave. In practice, the buyer who signed it rarely feels that way three weeks and one legal bill later — which is exactly why the discipline has to be built in before the offer goes out, not relied on after.
Key takeaways
An LOI’s non-binding status is a real legal fact, and it is also a weak defence against a buyer’s own psychology. The clauses that matter for keeping an offer honest are not the ones a court would enforce — they are the specific conditions a buyer commits to in writing, to themselves, before the parts of the process that create pressure to keep going even after the numbers stop supporting the deal.
An Ontario LOI for a business sale “almost always contains some binding clauses” — typically exclusivity, confidentiality, costs and governing law — while “everything else — price, structure, conditions, representations — is typically non-binding until the purchase agreement is signed.” (treadstonelaw.ca, letter of intent guide) The same source recommends fixing seven commercial elements in the LOI itself — price and payment structure, asset versus share designation, conditions precedent, the exclusivity period, timeline, deposit terms, and employee or management intentions — specifically because leaving them vague “causes costly disputes” later. That split matters for discipline as much as for law: a buyer is legally free to walk from the non-binding price and structure right up to signing the purchase agreement, but is contractually locked into the exclusivity period they agreed to, which is exactly the window where the sunk-cost pressure builds.
A seller faces a mirror-image risk during that exclusivity window, and the market has a standard answer to it: a break fee clause tends to appear specifically where “a seller took the business off the market for a period” and wants compensation if the buyer walks away after tying up that time. (treadstonelaw.ca, break fees in an LOI) A buyer asking for real exclusivity — enough time to run proper diligence without a competing bidder — should expect a seller, or a seller’s advisor who has seen this before, to ask for a break fee in return. That is not a sign of a difficult seller; it is the seller pricing the same risk the buyer is trying to manage on their own side, and a buyer who understands that going in negotiates the fee’s size and trigger conditions rather than being surprised by the ask.
The legal non-binding status of price and conditions says nothing about the buyer’s own incentives once diligence has started. A pattern documented on the seller side of this market is instructive here even though it is written from the other direction: problems tend to “surface partway through due diligence, after a buyer has already spent time and legal fees getting to a signed letter of intent, which is exactly when a seller has the least room to walk away.” (deavo.ai/insights/five-mistakes-that-lower-your-sale-price) Read from the buyer’s side, the same mechanism runs the other way: by the time a real problem surfaces in diligence, the buyer has often spent enough on legal fees and internal time that walking away feels like admitting the spend was wasted, even when the deal itself has stopped making sense. Legal non-binding status does not protect against that pressure — only a decision made in advance does.
The practical fix is to write down, before the LOI is signed, the specific findings that would end the deal — not a vague sense of “if something bad turns up.” Deavo’s own red-flag list for reading a target’s financials is a reasonable starting checklist to pre-commit against: owner compensation, benefits or personal expenses run through the business; one-time items that were not properly backed out; related-party pricing, “including rent paid to a property the owner also owns”; a gap between the statements and what was filed with CRA or for GST/HST; accounts receivable growing faster than revenue; and margins moving year to year “without an obvious explanation.” (deavo.ai/insights/reading-financial-statements-before-you-buy) The same source is explicit that none of these flags “signal on their own that a business is a bad opportunity” — which is precisely why the trigger has to be decided in advance, calmly, rather than argued out in the moment a flag actually appears and the pressure to keep going is highest.
A buyer signs an LOI for a business at $1.8 million with a sixty-day exclusivity period and a written pre-commitment: walk if customer concentration among the top three accounts exceeds 45% of revenue, or if two consecutive years show a margin swing greater than four points with no documented explanation. Week five of diligence turns up exactly the second trigger — a six-point margin drop in the prior year traced to a one-time inventory write-down that was never disclosed. Because the trigger was written down before the offer, walking away is a decision the buyer already made, not one being made for the first time under pressure with $22,000 of legal fees already spent and a signing date the seller keeps mentioning.
Related: what a letter of intent should and should not fix, the glossary entry on letter of intent (LOI), and spotting a business that is being sold too late.
Legally, yes — price is one of the terms that stays non-binding until the purchase agreement, so a buyer can propose a lower number based on a diligence finding rather than walking entirely. Whether that is the right call depends on the finding: a fixable, one-time issue is a repricing conversation, while a trigger that points to a structural problem with the business is a walk-away decision a renegotiated price will not actually solve.
It is a reasonable assumption even without a published rule tying the two together. A break fee compensates a seller for time the business was off the market, so a longer exclusivity window is a larger version of the exact risk the fee exists to price — a buyer asking for ninety days rather than thirty should expect the break-fee conversation to be more serious, not less.
A short call is enough to turn a vague sense of red flags into specific, written walk-away triggers before you make an offer.
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