When selling your SaaS business, the Letter of Intent (LOI) is one of the most important documents you’ll encounter. Think of the LOI as a clear roadmap—it outlines the key points of the deal, reflecting the mutual understanding and agreement between buyer and seller. Later, when drafting the final sales and purchase agreement, both parties often revisit the LOI to reaffirm the core terms initially agreed upon.
Here’s what typically goes into an LOI:
- Transaction Structure: Stock vs. Asset Deal
An LOI will clearly specify whether the deal is structured as a stock purchase (buying shares of your company) or an asset purchase (acquiring specific assets only). Each option has different implications—tax, legal, and operational—that we’ll explore further in a future post.
- Percentage of Ownership Acquired
The LOI details how much of the company is being acquired, whether it’s a full acquisition or a majority stake. In partial acquisitions, it will clearly outline the exact number of shares being purchased.
- Call and Put Options
In cases where a majority and not the entire company or all its assets are being acquired, the LOI might specify put and call options: Your right as a seller to have the buyer purchase your remaining shares in the future at a predefined price. Inversely, the buyer might be given the right to acquire remaining shares you hold, again typically at a set price (call option).
- Purchase Price and Payment Terms
The LOI details the exact purchase price, how much is paid upfront, and the portion to be paid at a later date (the holdback). It also covers specifics around any earn-out arrangements, clearly spelling out performance metrics and formulas that determine the earn-out payments.
- Assumptions Underlying the Offer
Buyers typically base their offers on certain core assumptions about your business. The LOI will state these explicitly—highlighting what’s fundamentally important to the buyer and ensuring that all parties have clarity on the conditions underpinning the deal. Examples include expectations regarding available working capital at the time of acquisition, or requirements that the CEO or other key personnel remain with the company for a specified minimum period post-acquisition.
- Due Diligence Details
The LOI outlines the scope and timeline for due diligence (start date and expected duration). It also specifies any particular information requests or processes. For example, the buyer may request to speak to your customers and seek a reference.
- Exclusivity Clause
An exclusivity clause typically restricts you from negotiating or engaging with other potential buyers during the due diligence period. This ensures both parties remain focused and committed to bringing the deal to a successful close.
- Governing Law
The LOI specifies which jurisdiction’s laws will govern the agreement. If our usual jurisdiction isn’t comfortable for you, we typically select a commonly accepted legal jurisdiction, such as Delaware or New York.
Your Comfort and Clarity are Essential
LOIs are intentionally clear and concise, with limited legal jargon, making them straightforward to understand. As you read through the LOI, you should feel confident that it accurately represents the key terms of the deal. Always ensure the fundamental aspects you’re expecting are clearly and comfortably represented in this crucial document. An LOI should set the stage for a transparent, efficient, and mutually beneficial acquisition process.