It is often presented as a formality, a courtesy document that precedes the real negotiations. That is an expensive mistake.
The letter of intent sets the frame for everything that follows. What is conceded there is hard to renegotiate, and some of its clauses bind you from the moment you sign.
A business transaction engages the Business Corporations Act, the Civil Code of Québec for the sale itself, and filings with the Registraire des entreprises du Québec.
What it is actually for
A letter of intent serves three purposes. It confirms the parties are in the same range before costs are incurred. It organizes what comes next: who does what, and by when. And it protects the buyer while the business is examined.
Without one, due diligence begins blind and the seller remains free to negotiate elsewhere while the buyer pays professionals.
The clauses that bind you
This is the most misunderstood point. A letter of intent is generally non-binding as to the transaction, yet it contains clauses that are fully binding.
Confidentiality
It protects the information the seller is about to disclose. It survives a failure of the negotiations and its breach is actionable.
Exclusivity of negotiation
The seller undertakes not to negotiate with another buyer for a set period. It is the consideration for the work the buyer is about to fund.
Allocation of costs
Who pays what if the transaction does not close. Absent a provision, each side bears its own costs, which is not always fair.
Governing law
Useful as soon as one party is not from Quebec, and often overlooked at this stage.
What to put in, and what to leave for later
An indicative price or range, with the assumptions behind it: working capital level, absence of debt, normalized earnings. Without assumptions, a price means nothing.
The contemplated structure, shares or assets, because it changes everything for both parties, including on tax.
What is better not fixed too early: the detail of representations and warranties, indemnity caps and adjustment mechanisms. Those are negotiated in light of what due diligence reveals.
The most common mistake
Signing a letter of intent drafted by the other side without review, on the basis that “it does not bind anyone”.
A buyer-friendly letter locks in long exclusivity, states a firm price that due diligence can only push down, and imposes conduct-of-business obligations on the seller throughout. The reverse exists too.
An hour of review at this stage costs less than three months of negotiating from unfavourable ground.
What comes next
Once signed, due diligence opens. Its findings serve to adjust the price, widen the warranties sought or, sometimes, end the process.
Then comes the purchase agreement, which takes the frame of the letter and turns it into firm commitments. The more precise the letter, the faster that stage runs.
Frequently asked questions
Is a letter of intent binding?
It is generally non-binding as to the transaction itself, but some of its clauses are binding: confidentiality, exclusivity of negotiation, allocation of costs and governing law. That distinction must be spelled out, otherwise it gets litigated.
Can I walk away after signing one?
In most cases yes, subject to the binding clauses and the duty to negotiate in good faith. Withdrawing without reason after obtaining exclusivity and reviewing sensitive information may nonetheless engage your liability.
Should a price be stated?
An indicative price or a range, almost always, together with the assumptions behind it. Without that, due diligence starts without the parties knowing whether they are in the same range at all.
How long should exclusivity run?
Thirty to ninety days depending on complexity, sometimes with a conditional extension. Exclusivity that is too long ties up the seller; too short, and it does not cover due diligence.
The right time to get advice
It is before signing the letter of intent, not after. That is when exclusivity, the contemplated structure and the price assumptions that will frame everything else are fixed.
Going further: our mergers and acquisitions practice, due diligence, and shares or assets, the choice that changes everything.
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Lawyer, member of the Barreau du Québec since 2014, founder of MEKA AVOCAT. This text sets out general legal information: it describes rules that apply broadly, not the answer to one particular case, and does not replace advice on your situation.
