This week’s question for our “Ask Us Anything” series is one we get asked all the time.
"What are some common mistakes to avoid in a letter of intent?"
Five come up repeatedly, and what they have in common is that each one is an omission rather than an error. Nothing in a letter of intent is usually wrong. The damage comes from what nobody thought to put in.
Signing before anyone has read it. The most common and the most expensive. Buyers treat the letter as a formality because most of it is non-binding, then discover that the parts which do bind them are the parts they skimmed. You may have agreed that your deposit is non-refundable, or that you cannot withdraw from the transaction once it is signed, and both of those are ordinary things to find in a document nobody read.
Not saying which clauses are meant to bind. A letter of intent that never states its own status is not automatically safe, and the Court of Appeal has said so. In Wallace v. Allen, 2009 ONCA 36, a letter of intent for the purchase of a business was held to be binding, reversing the trial judge. Three things did it. The letter said it “must be reduced into a binding agreement of purchase and sale by the parties within the next 40 days”. The court found that “the parties used the language of contract — they used terms such as ‘it is agreed’ and ‘upon acceptance’ and ‘this agreement'”. And afterwards the seller announced his retirement and introduced the buyer “as the new owner”, conduct the court read as showing they “considered themselves legally bound to its terms”. The consequence for a buyer is that your conditions stop protecting you, because there is no walking away from an agreement a court treats as already made. Say plainly that the document is non-binding except for the clauses you then name, and name them.
Leaving out the conditions. If the deal is not expressed to be conditional on satisfactory due diligence and, where relevant, on financing, you have quietly given up your two best reasons to walk away. The practical exposure is the same as above. Your deposit may be gone, and you can be committed to buying a business after diligence has turned up something you would never have accepted going in. A condition that is absent does not announce itself, which is why almost nobody notices at signing.
Agreeing an exclusivity period that is shorter than the work. Exclusivity binds the seller not to shop the business while you investigate. Set it for six weeks when diligence realistically takes ten, and you will be asking for an extension at the point where you have spent the most money and have the least bargaining room.
Putting in a precise price too early. A single number implies a confidence you do not have before seeing the records, and it becomes the anchor for everything afterwards. A range tied to stated assumptions is both more honest and much harder for a seller to accuse you of retrading later.
There is a sixth that is less a mistake than a habit worth having. Give the letter an expiry date. Without one it can sit in a drawer for months and reappear as evidence of what you agreed, long after the numbers have moved.
For the full sequence — what to settle first, and why each term is worth arguing about — our guide to how to write a letter of intent for a business purchase works through it step by step.
This answer is general legal information, not legal advice, and it cannot account for the facts of your situation. Always speak with a lawyer before you act on it.
P.S. If a question like this one has come up in your own business, schedule a complimentary discovery call with our firm and we will walk through it with you.
