An LOI sits between an offer and a purchase agreement, and its job is narrower than either. Fixing too little in it causes disputes later; fixing too much in it wastes the leverage that diligence is supposed to create.
Key takeaways
An LOI exists to test whether two parties actually have a deal before either spends real money confirming it in detail. That job gets harder, not easier, when the document tries to fix every term up front — some things genuinely need to be pinned down early, and some things should stay open precisely because diligence has not happened yet.
The standing Ontario guidance on this is specific: fix purchase price and payment structure, the asset-versus-share designation, conditions precedent, the exclusivity period, the proposed timeline, deposit terms, and employee or management intentions. (treadstonelaw.ca, letter of intent guide) The same source is direct about the cost of skipping this: “a poorly drafted LOI causes costly disputes” when these elements are left vague. All seven share a common feature — they are things both sides can state clearly at the LOI stage without needing to see the results of diligence first. A price range, a structure, and a timeline do not depend on what diligence finds; they depend on what both sides are proposing to do, which is knowable on day one.
It matters which of the LOI’s terms are actually enforceable the moment it is signed. An Ontario LOI “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) That split explains why the seven elements above are worth fixing even though several of them are legally non-binding: fixing them clearly reduces the odds of a dispute later, even though either party can, as a legal matter, still walk from the deal itself. The binding clauses are the ones that carry real, immediate consequences — which is exactly why the exclusivity period deserves as much attention as the price.
The mechanics of an indemnity — the basket (the threshold below which small claims are not pursued), the cap (the ceiling on total exposure), and the survival period (how long a claim can be brought after closing) — are purchase-agreement terms, not LOI terms, and trying to fix them early usually backfires. The right basket and cap depend on what diligence actually finds: a target with clean, well-documented financials supports a smaller basket and a lower cap than one where diligence turns up several unresolved items. (treadstonelaw.ca, indemnity basket and cap explained) Locking a specific basket or cap number into the LOI, before diligence has told either side what risk the indemnity is actually meant to cover, is negotiating blind — and it gives up the leverage a genuine diligence finding should create. The same logic applies to the working-capital target and to specific representation-and-warranty language: both are better set once the numbers behind them are actually known.
A break fee is the seller’s answer to the risk the buyer’s exclusivity period creates. It 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 using that time. (treadstonelaw.ca, break fees in an LOI) A buyer asking for a genuinely useful exclusivity period — long enough to run real diligence without a competing bidder in the background — should expect this term to come up, and is better served negotiating its size and trigger conditions directly than being surprised by the ask partway through the conversation.
A buyer and seller sign an LOI for $2.6 million: 70% cash at closing, 30% vendor take-back over three years, structured as an asset purchase, subject to satisfactory financial and legal diligence within forty-five days, with sixty days of exclusivity and a $10,000 deposit. The employee-intentions clause states the two senior staff will be offered continued employment on substantially similar terms. What the LOI does not attempt to fix: the indemnity basket and cap, the exact working-capital target at closing, or the specific representations the seller will make about inventory condition — all three are left as “to be negotiated in the purchase agreement, informed by diligence.” Diligence turns up a $40,000 inventory discrepancy in week three. Because the indemnity mechanics were never locked into the LOI, that finding becomes a normal input into setting the basket and cap at the right level — not a dispute over a number that was fixed before anyone had a reason to know it was wrong.
Read the seven-versus-not-seven split as one test rather than seven separate rules: does fixing this term now cost either party real information it will only have later? Price, structure, timeline and the exclusivity window pass that test — both sides already know what they are proposing, and fixing them early removes ambiguity without giving anything away. Indemnity mechanics, the working-capital target and specific representation language fail it — the right number depends on findings neither side has yet, and fixing it early means guessing, then living with the guess regardless of what diligence turns up. The same test applies to any term not on the standard list: if diligence could reasonably change the right answer, it belongs in the purchase agreement: if it could not, it belongs in the LOI.
Related: making a non-binding offer that keeps you honest, the glossary entry on letter of intent (LOI), and setting the working capital target fairly.
A seller can ask, and it is worth understanding why that request usually is not in the buyer’s interest to accept. Committing to a cap before diligence has run means either the number is set too low to actually protect the buyer once real findings emerge, or so high that it is not a meaningful concession from the seller — neither outcome is one diligence, done afterward, can meaningfully improve on.
That depends entirely on what the LOI itself says, which is exactly why deposit terms are one of the seven elements that belong in the document rather than left implied. A well-drafted LOI states plainly whether the deposit is refundable on a failed condition precedent, forfeited on an unjustified walk-away, or something in between — silence on this point is one of the more common sources of dispute.
A short call is enough to review a draft LOI against what genuinely belongs in it at this stage.
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