Toronto business and franchise lawyer Sukhi Hansra, JD, MBA, of Hansra Law walks through how to write a letter of intent for a business purchase, in the order you would actually settle the terms.
You have met the seller a few times, you have talked about a price, and now they have asked you to put something in writing. That written thing is a letter of intent, and most buyers write their first one with no idea which parts of the document are going to matter later.
Here is the part worth knowing before you start. The letter of intent is where your negotiating position is either protected or quietly wasted. The danger is not that the letter of intent traps you legally, because the document is usually not binding. The danger is that you commit to a purchase price before anyone has tested whether the price is fair, accept conditions that do not protect you, and start spending money on advisors with no preliminary view of the risks sitting inside the business. Buyers rarely notice at the time, because the letter of intent reads like a summary of a friendly conversation.
This guide walks through writing one in the order you would actually settle the terms, rather than as a list of clauses. If you want the background on what a letter of intent is, whether it binds you, and why the document exists at all, our guide to the letter of intent covers that ground. This page assumes you already know and now have to write one.
This article is general business and legal information, not advice for your specific situation. A letter of intent can create real obligations depending on how it is written, and the steps below are a guide to drafting rather than a substitute for having your own document reviewed. Speak with a lawyer about your own transaction before you sign anything.
1. Write down what you have already agreed
Do not open a template. Start by writing out, in plain sentences, every term you and the seller have actually discussed — the price you talked about, what you think you are buying, when you would want to close, and anything the seller has said they need.
That list is the real content of your letter of intent. Everything else is structure around that list. Starting here matters because a template invites you to fill in fields you have not thought about, and a term you invent to fill a blank is a term you will have to defend later.
That list also shows you the gaps. If you cannot write a sentence describing what happens to the seller’s staff, or whether the seller is staying on after closing, then you have not agreed that yet, and the letter of intent is where you find out rather than three weeks into due diligence.
2. Name what you are actually buying
Say in the first paragraph whether you are buying the shares of the company or its assets. That sentence is the single most consequential line in the document, because the choice determines what you inherit, how the price gets allocated, and what the eventual purchase agreement will look like.
Buyers often leave the structure vague because the choice feels like a technical detail to settle later. The choice is not a detail. In a share purchase you take the company with its whole history attached, including its tax years and its old contracts. In an asset purchase you buy a defined list instead, which changes what transfers and on what terms.
Our guide to asset purchase versus share purchase sets out how the two structures move liability between buyer and seller. Pick one before you write the letter, and say which one you picked. If you genuinely have not decided, write that you intend to acquire the business and that the structure remains to be agreed, so nobody later claims you committed to something you did not.
3. Set out the price and how it will be paid
Give a price range rather than a single number, and say how the money arrives. BDC’s guidance is that a letter of intent should set out “a price range for the acquisition, subject to amendment, and the terms of payment”.
A range is not indecision. Giving a range is about being accurate, because you are writing this before you have seen the financial records in any depth. A precise number implies a confidence you do not yet have and gives away room you will want later. A range with a stated reason attached — that the final figure depends on what due diligence shows — is both honest and considerably harder for a seller to argue you have moved away from.
A range is also only ever as good as the assumptions sitting underneath it, and those assumptions are specific to the business you are buying. What do the earnings normalise to once the owner’s compensation is adjusted to a market salary? Which customers are likely to stay after the owner leaves? How much working capital does the business actually need on the day you take it over, and what has the current owner been deferring that you will have to spend in your first year? Tie your range to answers like those and say so in the letter, rather than leaving the number floating.
Most buyers never get this far, and working the assumptions through properly is not a step most transactions include. It is worth the effort, because a price tied to stated assumptions is far harder for a seller to push back on later. When due diligence moves one of the assumptions, you are adjusting an agreed formula rather than reopening the price from scratch, which is a much shorter conversation. This is work we do with buyers directly, so if you are not sure what the right assumptions are for the business in front of you, it is worth a conversation before the number goes into writing.
How the price is paid deserves its own sentence. Cash on closing, an amount held back for a period, a vendor take-back note and an earnout tied to performance are all different deals at the same headline number. Write down which one you mean, even in outline, because a seller who reads the headline figure and pictures the whole figure arriving on closing day will treat any later mention of a holdback as you retrading the deal.
4. Ask for exclusivity, and put a length on it
Exclusivity is the clause that does the most work for you, and the one buyers most often sign without reading. Exclusivity means the seller agrees not to shop the business while you do your work. BDC describes it as “the duration of exclusivity of the negotiations, i.e. the period during which the seller agrees not to solicit or consider other offers”.
Two things about exclusivity are easy to get wrong. The first is asking for the clause at all. Some buyers never do, and then spend real money on advisors and due diligence while the seller carries on negotiating term sheets with other buyers, using your offer to draw a better one out of somebody else. The second is the length of the period, which is where most of the damage happens.
The trade is straightforward. Exclusivity protects the money you are about to spend on due diligence, so you want a period long enough to finish. The seller will push the other way, because exclusivity takes their business off the market while you make up your mind, and a seller who has been trying to sell for a year will not hand you six months of quiet. Ask for the time you need to finish diligence and a little more, and put a firm date on the period rather than a vague “reasonable period”.
In our own practice, the most common way a buyer weakens their own position is by signing a letter of intent before anyone has read it. That locks the buyer into positions which are hard to unwind later — the purchase price, whether that price actually matches the value of the business and the risk being taken on, the conditions that apply, and whether a deposit is refundable. It also skips the preliminary work, so problems that could have been found cheaply in week one instead surface during due diligence as red flags or outright deal killers.
The underlying point is worth stating plainly. It is far better to find out a deal is bad early than to find out after you have spent tens of thousands of dollars on lawyers and other professional advisors.
5. Set the due diligence period, and work backwards from it
State how long you need to investigate the business and what the seller has to give you. The sequence here is fixed. BDC notes that “usually, both parties will want to sign the LOI or similar document before launching a formal due diligence on the business”, which means you are agreeing your timetable before you know what you will find.
So work backwards. Decide how long due diligence realistically takes for a business this size, then make sure your exclusivity period is at least that long. If exclusivity runs out while your accountant is still working, the clause protected nothing and you paid for the privilege.
Write into this step what the seller must actually produce, in a list. Financial statements going back several years, corporate records, material contracts, the lease, employee information. You do not need every item nailed down at this stage, but naming the main categories now prevents the conversation where a seller treats each request as a new imposition. Naming them also puts a marker down that diligence is a condition of the deal rather than a courtesy.
6. Mark clearly which clauses are meant to bind you
Most of a letter of intent is not meant to be enforceable, but some of it is, and the document has to say which is which. Confidentiality, exclusivity and who pays costs are normally intended to bind both sides. The price and the structure are normally not, because they change once diligence is done.
This is the part that catches people, and the reason is worth understanding. BDC observes that a letter of intent is “not usually” binding as a formal purchase offer, but warns it “can be so much more detailed that it can be difficult to recognize the difference between the letter of intent and a formal purchase offer”. A thorough letter drafted with care can end up looking exactly like the purchase agreement you were trying not to sign yet.
The practical fix is a short section near the end stating plainly that the letter is non-binding except for the clauses you name, and then naming them. If you want the fuller explanation of how binding and non-binding clauses differ and what a mixed document looks like, that is covered in our guide to the letter of intent.
Before you send it, take a pen to your own draft and mark every clause you would be unhappy to be held to. If any of them sit outside your non-binding carve-out, you have found the problem while the problem is still free to fix.
7. Say who pays for what, and when the letter expires
Two short clauses that buyers routinely leave out. The first says who bears the cost of the transaction, which BDC lists as “the distribution and responsibility for costs inherent to the proposed transaction”. The second gives the letter an expiry date.
Costs are worth stating because they are larger than first-time buyers expect. BDC puts the expenses of a transaction at “$10,000 to $100,000 or more depending on the nature and complexity of the transaction”. The normal position is that each side pays its own advisors, and saying so removes an argument later.
The expiry date matters for a different reason. A letter of intent with no end date can sit in a drawer for months and then be waved at you as evidence of what you agreed, long after the numbers have moved. Give the letter a date by which it lapses if a purchase agreement has not been signed. That date also does useful work on the seller, because it turns your offer into something with a deadline attached.
8. Can you write it yourself?
For the letter of intent, largely yes, and this guide is written on that basis. The letter of intent is a short document recording terms you have already discussed, and a buyer who writes their own first draft understands their deal better than one who signs whatever arrives.
What you should not do is sign the letter without having it reviewed, and at the very least having the binding clauses read properly. Always have a letter of intent looked at before you sign it. Reading your own draft will not tell you whether the conditions actually protect you, whether your deposit is fully refundable, whether the pricing assumptions hold up, or what else is sitting in the document that you have not thought to look for. Those are the mistakes that are expensive and hard to undo afterwards.
The purchase agreement is a different question with a different answer. People often ask both in the same breath, so it is worth separating them. The letter of intent is a two or three page summary of an agreement in principle. The purchase agreement is the document that actually transfers the business, and carries the representations, the warranties, the indemnities and the closing conditions that determine what happens when something turns out not to be as described.
Drafting your own purchase agreement is not realistic for most buyers, and the reason is not that the words are difficult. The value of a purchase agreement sits in what the document anticipates, and the anticipating is the job. If you would like a sense of how the negotiation runs from here, our guide to negotiating the purchase or sale of a business covers the stage that follows.
Conclusion
Write the letter of intent in the order above and you will have a document that records what you agreed, protects the money you are about to spend, and does not commit you to anything you did not intend. Settle the structure, put a range on the price, ask for exclusivity long enough to finish diligence, and name the clauses that bind you.
Although these are good starting points, every transaction produces a term the standard sequence did not anticipate, and how that term should be written depends on facts a general article cannot know about your deal. A good next step is to speak with someone who has been through it before, whether an Accountant or a Business Lawyer. Our guide to buying an existing business sets out where the letter of intent sits in the wider process.
If you have a letter of intent in front of you, have it reviewed before you sign it rather than after. Schedule a complimentary discovery call with our firm, or reach the office at 416-580-0345.
