What is a Letter of Intent (LOI) when selling a business?

When a buyer is serious, they often send a letter of intent. Here's what it is, what's in it, and what to watch for, in plain words.

What it is

A letter of intent (often called an LOI) is a short document that writes down the main points a buyer and seller have agreed on before the full purchase agreement is drawn up. It shows the buyer is serious and gives both sides a clear starting point. BDC notes that it is often preceded by a confidentiality agreement, and that the final price is usually only settled after the buyer has done their checks.

Where it fits in the sale

1. You list the business and talk with buyers.
2. A buyer signs a confidentiality agreement (NDA).
3. You share more details, and the buyer shows proof of funds.
4. You agree the main terms in a letter of intent.
5. The buyer does due diligence.
6. Lawyers prepare the purchase agreement.
7. Closing and handover, including the closing day adjustments.

See all the steps in How to sell your business without a broker.

What's usually in it

• Price, or a price range, and what it is based on.
• Payment terms. How much is paid at closing, and whether part is paid later. For example, vendor take-back financing, where you agree to be paid part of the price over time.
• What's included. Equipment, stock, the business name, customer lists, and whether it's an asset sale or a share sale.
• Due diligence period. How long the buyer has to check your records.
• Exclusivity, or "no-shop". A period when you agree not to look for or talk with other buyers.
• Closing date, or a target date.
• Conditions, such as the buyer getting financing, or your landlord approving a lease transfer.
• Your role after the sale, such as a training period.
• Who pays which costs if the deal doesn't go ahead.

Binding and non-binding parts

Most of an LOI is usually non-binding. The price and deal terms are a plan, not a promise, so either side can still walk away. Some parts are often binding, which means you must follow them even if the sale doesn't happen:

• Confidentiality: keeping each other's information private.
• Exclusivity: not dealing with other buyers for the agreed time.
• Often also who pays costs, how the letter ends, and which province's law applies.

A good LOI says plainly which parts are binding. If it doesn't, ask.

A simple LOI outline

This is only an outline of the usual headings, to help you know what to expect. It is not a form to fill in.

1. Parties (buyer and seller)
2. The business being sold
3. Type of sale (asset sale or share sale)
4. Price
5. Payment terms (including any vendor take-back)
6. What's included and excluded
7. Due diligence period
8. Exclusivity (no-shop) period
9. Conditions
10. Seller's transition and training role
11. Target closing date
12. Confidentiality
13. Costs
14. Which parts are binding
15. Governing law
16. When the letter expires
17. Signatures

Tips for owners

• Keep exclusivity short and with a clear end date, so you're not tied up for months.
• Ask for a set due diligence period, not an open-ended one.
• Be clear on how you'll be paid. If part is paid later, ask your lawyer about security for those payments.
• Watch vague conditions, like "subject to the buyer being satisfied". Ask for them to be specific.
• Don't stop running the business well while the deal is in progress.

Unfamiliar words? See our plain-English word guide.