What Is a Letter of Intent in a Staffing Company Sale?

A purchase agreement can run a hundred pages or more. A letter of intent runs four or five, and that is where your deal actually gets decided. By the time the lawyers are drafting, they are mostly documenting choices that were made weeks earlier.

A letter of intent is a buyer telling you in writing, with a signature, the deal it intends to do. Price, structure, what happens to you afterward, and what still has to be confirmed before anyone signs a purchase agreement.

It is not the contract. The definitive purchase agreement is, and nothing in an LOI obligates either side to get there. But by the time an LOI is in front of you, the economics of your transaction should be largely settled, and a good one gives you enough to decide whether you want this deal with this buyer.

What Is Actually in a Letter of Intent?

A handful of pages, usually four to six. Here is what should be in them.

Purchase price and structure. The enterprise value, and then how it is being paid. Cash at closing, and whatever sits alongside it: a seller note, an earnout tied to future performance, rollover equity if the buyer wants you to keep a stake. Two offers can carry the same enterprise value and put very different amounts of money in your account on the closing date. Read the structure before you react to the number.

Cash free, debt free, and net working capital. Debt comes out, cash goes to you, and a target amount of net working capital stays in the business. The LOI should say how that target is calculated. In staffing, where the balance sheet is mostly accounts receivable and accrued payroll, the target is a meaningful number, and it is a subject I will come back to in its own article.

Escrow and indemnification. Some of your cash gets held back, typically for twelve to twenty four months, to stand behind the representations you will make in the purchase agreement. In some deals representations and warranties insurance does that job instead, which reduces or eliminates the holdback. I have written about the mechanics in Why Is Part of My Purchase Price Sitting in Escrow? and about what you are actually standing behind in What Are Representations and Warranties in a Staffing Company Sale?

Transaction structure. Stock or assets, and any tax elections that come with it. This changes what you keep after tax, which is the only version of the number that matters.

Your role after closing. How long the buyer wants you around, doing what, on what terms, and what your non-compete looks like. Most founders read this section more carefully than the price, and they should.

Key employees. Whether the buyer wants retention or employment agreements from your leadership team, and whether closing depends on getting them signed.

Diligence scope. A good LOI tells you what is coming. A quality of earnings analysis of your financials, legal review of contracts and corporate records, employment and benefits, insurance and workers compensation, tax, IT and systems, and in staffing almost always a close look at client concentration, contract terms, pay and bill rates, and worker classification. It should also say how long the buyer expects to need. Diligence is a large enough subject that it gets its own article.

Conditions to closing. What else has to happen. Financing, if the buyer still needs to raise it. Investment committee or board approval. Third party consents.

Exclusivity and timeline. How long the buyer wants to be the only party you are talking to, and the path to signing.

Expenses, confidentiality, and termination. Each side pays its own advisors. Confidentiality carries forward. And either party can walk.

How Is an LOI Different From a Term Sheet or an Indication of Interest?

An indication of interest comes earlier and commits to less. It often gives a valuation range instead of a number, and it usually shows up before the buyer has met you or worked through your financials in any detail. It tells you a buyer is interested and roughly where they might land.

The letter of intent is the defined version. A number, a structure, your role, the mechanics, and a request for exclusivity. With an IOI you know someone is interested. With an LOI you know what deal you are being offered.

What Should Already Have Happened Before an LOI Arrives?

This is the part that determines whether the document means anything, and it is where processes differ most.

A buyer handing you a letter of intent should know your business well by that point. In our processes that means they have read a confidential information memorandum, worked through historical and current financials, held several calls with management, come back with follow up questions and received answers, and sat across a table from you in person. Not everything gets handed over before signing. Some diligence is expensive and intrusive and no buyer should be running it on speculation, which is why it waits. But the buyer should have seen enough to price the business on information rather than on assumptions it plans to test later.

The same is true in the other direction, and it gets less attention than it deserves. You should know the buyer. How they think about the business, what they intend to do with it, how the owners and employees of their last few acquisitions have fared. If your deal has you staying on for a couple of years, that matters enormously. If you are handing off over ninety days and leaving, it matters less, but you are still going to spend the next several months in daily contact with these people while they take apart your company for diligence. An LOI should not be the first time you have formed an opinion about them.

A competitive process also means this happens more than once. What we are after is several letters of intent on the table at the same time, from different kinds of buyers, private equity platforms, portfolio companies making add-on acquisitions, strategics, with different structures attached. Price is part of it. The larger part is that a seller with four offers is choosing between deals, and a seller with one offer is only deciding whether to take it.

Do the Terms Hold After Signing?

Usually. Changes to signed LOI terms are not common in a well prepared process, and the reasons they happen are worth knowing because most of them are avoidable.

The usual cause is that the business changed. Results softened during diligence, a large client left, margins compressed, or something material turned up that nobody could have seen from the outside. A buyer that priced your company off one picture is going to say something when the picture moves.

When terms move for any other reason, it is almost always because the buyer did not do enough work before signing. A buyer who priced on assumptions finds things in confirmatory diligence it should have found months earlier, and the LOI turns out to have been a placeholder. This is the whole argument for front loading the work, and it is an argument serious buyers make themselves. Reputable acquirers do not like revisiting signed terms. Sellers talk to each other, advisors have long memories, and a buyer known for retrading gets fewer looks at good companies. They would rather do the work up front and sign something they can stand behind.

If a buyer does come back mid-process, our first move is not to negotiate. It is to make them prove it. What specifically changed, why it is permanent rather than a quarter of noise, and why the thesis they underwrote three months ago no longer holds. A fair amount of the time that conversation ends with the original terms intact, because the buyer’s case does not survive being examined and they knew it might not.

When something has genuinely and durably changed, and a client is prepared to accept a revision rather than go back to market, I would rather move the money than cut the price. Hold the valuation and put the disputed portion into an earnout. If the buyer still believes what it believed when it signed, and the shortfall is timing, the seller gets a chance to earn it back. A price cut is permanent. An earnout is a disagreement with an expiration date.

A price cut is permanent. An earnout is a disagreement with an expiration date.

Countering and Signing

An LOI is an offer, and offers get countered. Price, the mix of cash and contingent money, the length of exclusivity, the non-compete, the escrow, what your job looks like afterward. Some of that moves through redlined drafts and a lot of it moves through phone calls. A buyer who has spent three months getting to this point is not going to walk because you asked for something.

Exclusivity, and Why the Buyer Needs It

Once terms are agreed and the LOI is signed, exclusivity starts. Sixty to ninety days is normal, longer on complicated transactions.

Sellers sometimes resist this, and it helps to see it from the other side. The buyer is about to commission a quality of earnings analysis, put employment and benefits counsel on the file, run tax and insurance specialists through the business, and have its attorneys draft a purchase agreement. That is real money on a deal that might not close, and no buyer is going to spend it while you keep taking calls from its competitors. Exclusivity is what makes that spend rational. It is also finite, and it expires.

What Is Binding and What Is Not?

Most of a letter of intent is not binding, including the price. The economics are expressed as the deal the parties intend to do, subject to confirmatory diligence and a definitive purchase agreement.

A few provisions are binding, and they are usually grouped at the back where the reading gets faster. Exclusivity is the significant one. Confidentiality is binding, though it typically restates an NDA you already signed. So is the allocation of expenses, meaning each side pays its own professionals whether or not the deal closes, and the governing law.

Either party can also terminate. Buyers walk when diligence turns up something they cannot get comfortable with. Sellers walk when a buyer’s conduct during diligence tells them something the months before the LOI did not. Neither happens often, and neither is a disaster. An LOI is a serious statement of intent, not a cage.

What Happens After You Sign

Confirmatory diligence starts in earnest and the buyer’s lawyers start drafting. The purchase agreement will contain a great deal the LOI never mentioned: the full representations and warranties, the indemnification mechanics, the covenants governing how you run the business between signing and closing, and the disclosure schedules. That is the document you close on, and it deserves its own treatment.

Have the Right People Around You

Founders who move through this stage without much anxiety are rarely the ones who read the LOI most carefully. They are the ones who had people around them who had read a hundred of them.

I have negotiated a lot of these letters, and what that experience is worth to a client is not knowing what the terms mean. It is knowing which ones a buyer will give up without much resistance, which ones are worth spending goodwill on, and which ones sound important and are not. It also means knowing the buyers. When you have sat across from the same acquirers repeatedly, you develop a fairly reliable sense of who honors what they sign.

You will probably do this once. The people advising you should not be doing it for the first time either.