LOI vs term sheet

Buyers and sellers encounter both terms and often assume a formal legal distinction separates them. In practice, Canadian small business deals use the two labels loosely, and the format on the page tells you more than the title does about which document you are looking at.

What a letter of intent is

A letter of intent reads as correspondence expressing a shared understanding, addressed from one party to the other, setting out price, structure, timeline and the conditions that still have to be satisfied before a binding agreement is signed. It is the standard next step once a buyer and seller have agreed, in principle, to move forward on a specific business, and it is largely non-binding except for a handful of clauses — exclusivity, confidentiality and cost allocation among them — that are usually drafted to bind regardless of the document’s overall label.

What a term sheet is

A term sheet sets out the same kind of substance — price, structure, key conditions — as an itemized list rather than a narrative letter, without the correspondence framing. It shows up most often where financing or investment is involved, or where a seller is running a process that invites more than one prospective buyer to put comparable terms on the table at the same time, so the terms can be compared line by line before one is chosen for exclusive negotiation.

Where the real difference sits

• Format: a letter of intent reads as correspondence expressing mutual intent; a term sheet reads as a structured list of terms with no narrative framing
• Context: an LOI is the standard vehicle in a straightforward one-buyer sale; a term sheet is the standard vehicle in financing rounds and in processes comparing several prospective buyers side by side
• Neither label decides what is legally binding — only the specific clauses inside the document do, whatever it is called
• A term sheet is more easily set aside for a competing bidder’s terms mid-process; an LOI, once signed, usually locks in exclusivity that ends that comparison

Why buyer and seller pull in different directions

A seller running a competitive process often prefers collecting term sheets from several prospective buyers before committing to one, keeping the comparison alive as long as possible. A buyer who has already identified the specific business they want typically prefers moving straight to a single LOI with exclusivity, so no one else can be negotiating for the same business while diligence money is being spent. That tension — a seller wanting to keep options open, a buyer refusing to spend real money without exclusivity — shapes which document actually gets used and how quickly.

What commonly goes wrong

The most common failure is treating the words “non-binding” at the top of either document as covering everything inside it. Exclusivity, confidentiality and cost provisions are routinely drafted to bind regardless of the document’s label, and a party who breaches a no-shop clause while “just comparing term sheets” can face real exposure for it. A second failure is treating a term sheet’s itemized terms as informal enough to skip legal review, when the terms agreed there are exactly what gets carried forward into the definitive agreement and are genuinely difficult to walk back once diligence and exclusivity are underway.

How to decide

Which document to use is less a deliberate choice than a reflection of the process already underway: a single buyer negotiating one deal typically moves to an LOI, while a seller inviting multiple offers, or a deal with a financing or investment component, more often collects term sheets first. What matters more than the label is reading every clause for whether it states it binds, confirming exclusivity and cost terms explicitly whichever format is used, and having a lawyer review the document before signing — the same legal consequences can follow from a two-page term sheet as from a longer letter.