SaaS Letter of Intent (LOI) Explained: Every Clause a Founder Must Understand

You've run a process, fielded offers, and your board is excited. A letter of intent lands on your desk from a serious buyer. The number is attractive. The buyer seems great. Everything looks like it's moving toward closing.

Here's what most founders don't realize: the LOI is the single most important document in your entire M&A transaction — more important than the purchase agreement, more important than the CIM. This is where your economics get locked in. This is where your leverage is highest. And this is where most founder mistakes happen.

The SPA (Stock Purchase Agreement) is longer and more detailed, but it's basically paperwork executing what you already negotiated. The LOI is where the actual negotiating happens. The LOI is where you get paid.

Let's break down what it actually is, what every clause means, and how to think about the most important number in the document: not the enterprise value headline, but the net proceeds you'll actually receive.

What an LOI Actually Is

An LOI is a letter from a buyer expressing their intent to acquire your company. It outlines the key economic terms (price, structure, payment mix) and key non-economic terms (timeline, conditions, your employment, exclusivity).

Here's the critical distinction: Most LOI terms are non-binding — but some are binding.

Non-binding terms typically include:

• Enterprise value and price structure
• Payment mix (cash vs. equity vs. earnout)
• Management retention and compensation
• Use of proceeds (debt payoff, working capital, equity distribution)

Binding terms typically include:

• Exclusivity: You can't shop to other buyers during the exclusivity period
• Confidentiality: You can't disclose deal economics to others
• Cost allocation: Who pays for due diligence, legal, RWI insurance
• Conduct of business: Limits on what you can do between LOI and close

Once you sign the LOI, exclusivity kicks in immediately. That means you're locked into negotiating exclusively with this one buyer for the duration specified (typically 45-90 days). You cannot solicit or accept offers from other buyers. If a better deal materializes, you can't take it.

This is why your leverage is highest before you sign the LOI — you have options. Once you sign, the leverage shifts. The buyer knows you can't talk to anyone else, and they can retrade (renegotiate) between LOI and close.

The Enterprise Value vs. Net Proceeds Bridge

This is where founders get confused, and where money slips away.

Enterprise Value is a headline number. It's the number that goes in the press release. It's also, by itself, basically meaningless.

What you care about is net proceeds: the actual money that ends up in your bank account (or your equity holders' accounts) at close.

Enterprise Value minus debt, transaction fees, escrow holdbacks, working capital adjustments, plus cash in the company equals net proceeds. The gap between the two numbers can easily reach 20% or more.

Let's walk through a realistic example.

Worked Example: $50M Headline EV

Enterprise Value: $50,000,000

Less: Debt payoffs

• Venture debt: $2,000,000
• Line of credit: $500,000
• Subtotal: $(2,500,000)

Less: Transaction costs

• Investment banker fee (4% of EV): $2,000,000
• Seller legal fees: $150,000
• Accounting fees: $40,000
• Subtotal: $(2,190,000)

Less: Escrow/Holdback (10% of EV, held 18 months)

• Subtotal: $(5,000,000)

Less: Working capital adjustment

• Target working capital: $3,000,000
• Actual working capital at close: $2,700,000
• Seller adjustment owed: $(300,000)

Plus: Cash in the company

• Cash at close: $500,000

Net proceeds available for equity holder distribution: $40,510,000

So that $50M headline becomes $40.5M in practice. That's about 81% of headline. And that's before considering:

1. Tax treatment (this is a separate analysis, but if the deal is taxable to you, you're losing 20-40% to federal + state taxes)
2. Investor preferences (if preferred equity has a liquidation preference, they get paid before you)
3. Your specific share (if you own 60% but others own 40%, your proceeds are 60% of the net)

The more senior you are (more common founder ownership), the less this affects you. But it matters.

Key LOI Components Explained

Enterprise Value

The headline acquisition price. This is what gets announced. It's important, but it's only meaningful in context of how it's structured.

What's market: For B2B SaaS deals at $2-20M ARR, typical EV multiples range from 4x-12x ARR (lower for slower growth, higher for compounding growth and strong retention). A $10M ARR company might command $40-120M EV depending on growth rate, churn, and market dynamics.

Red flag language: "Up to $50M" or "Enterprise value up to $50M." The "up to" means the buyer is reserving the right to adjust downward. A real offer has a fixed number (or a narrow range with clear adjustment mechanisms, like EBITDA true-ups).

Payment Mix: Cash, Equity, Earnout, Seller Note

This is where the structure game matters.

Cash at close (typical range: 50-80% of EV for $2-20M ARR deals)

• Lowest risk, highest certainty
• Affected by escrow, debt, and fees as shown above
• The only form of consideration you control if buyer circumstances change

Rollover equity (typical range: 10-25% of EV)

• You're getting a percentage stake in the buyer's company or HoldCo
• Risk: You're betting on the buyer's future. Buyer goes public, great. Buyer implodes, you lose it.
• Timing: Usually illiquid for 3-5 years (PE funds typically target exits in that window)
• Why it matters: PE buyers love this because it aligns incentives. They want you to care about the combined company's performance.

Earnout (typical range: 5-20% of EV)

• Contingent on hitting future milestones (revenue targets, margin targets, customer retention targets)
• Risk: You're betting on your ability to hit targets under new ownership where you may have limited authority over the decisions that affect them
• Red flag: Binary cliffs (hit the target exactly, or get nothing). Insist on sliding scales and cumulative catch-up.

Seller note (rare above $20M EV)

• You're financing part of the acquisition
• This is last in line if things go wrong
• Should not happen unless you're very confident in buyer and have leverage

The breakdown typically looks like: $50M EV might be structured as 70% cash ($35M), 20% rollover equity ($10M), 10% earnout ($5M).

Escrow and Holdback

Usually 10-15% of enterprise value is held in escrow for 12-18 months post-close as a liability reserve for warranty and representation claims.

This is money you don't get immediately. It sits in an escrow account controlled by a neutral third party. If the buyer brings claims against the escrow (you claimed you had no material customer churn but you did; you claimed no pending litigation but there was), that money gets released to cover it.

You want to minimize escrow.

Strategies:

• Reps and Warranties Insurance (RWI): Buyers typically purchase this at ~0.5-1% of EV. It covers most rep and warranty claims above a deductible, which means the escrow can be much smaller (sometimes just a baseline cash reserve). Usually available at deals above $25M EV, but increasingly available for smaller deals.
• Negotiate the percentage: 10% is market. 15% is aggressive. Push for 10% or less.
• Negotiate the tail: 12 months is standard. 18 months is long. 9 months is better for you.

Exclusivity

The binding term that locks you into exclusive negotiations with this buyer.

Typical range: 45-90 days.

Why it matters: If you sign an LOI today and close in 150 days, but due diligence takes 100 days and financing/board approvals take another 30 days, you've been fully committed. If the buyer starts retrading aggressively in month 3, you have no recourse because you signed away your right to talk to other buyers.

Red flag: Exclusivity longer than 90 days (especially with no clear close timeline). This is the buyer buying optionality on your company while you can't shop to anyone else.

How to push back: Tie exclusivity to milestones. "Exclusivity for 60 days. If close doesn't occur by [specific date], exclusivity terminates." This protects you from indefinite lock-in.

Conditions to Close

The buyer will outline conditions they need satisfied before closing (beyond just completing due diligence):

• Financing contingency: "Subject to buyer securing committed financing." This is a major red flag. It means they don't have the money yet. If financing falls through, the deal dies — and you've been off the market for 60-90 days. Push back hard. A serious buyer has committed financing or has confirmed ability to fund before submitting an LOI.
• Regulatory approvals: For deals involving specific regulations, buyer might need approvals. Usually not a problem for smaller deals, but always clarify.
• Accuracy of reps and warranties: Standard. Both you and buyer need to confirm that the representations made in diligence are accurate.
• Customer consent/change of control: If you have large customers with change-of-control clauses, their consent is usually a condition. Identify these early.

Timeline and Close Date

Expected close date is important because it affects risk and timing value.

• Fast close: Unusual, but happens with strategic buyers who've already done substantial homework. Less time for things to break.
• Typical close: 2-4 months. Leaves time for thorough diligence without being indefinite.
• Slow close: A red flag. The longer the process, the more likelihood of retrades, unexpected issues, or deal fatigue.

The old saying in M&A is: "Time kills all deals." The longer you're in process, the worse the odds of closing.

Employment Terms and Your Role

The LOI often includes or references your post-close employment:

• Your title and responsibilities
• Base salary and bonus (often flat for a period)
• Earnout bonus potential (tied to the earnout milestones)
• Non-compete and non-solicitation clauses (length and geographic scope)
• Equity vesting schedule (if receiving equity)
• Severance or change of control protections

This is important beyond just compensation. It affects your control, your optionality post-close, and your personal risk. Negotiate the framework before signing the LOI — these terms get harder to move once exclusivity is in place.

Your Leverage at the LOI Stage

This is critical: Your leverage is highest at the LOI stage. Multiple buyers are potentially competing for exclusivity. Once you sign, leverage flips to the buyer.

Before LOI:

• You can walk away
• You can engage with multiple buyers
• Buyer doesn't know your actual financials or operational nuances
• Buyer is estimating, and their offer is therefore conservative

After LOI:

• You're locked in (exclusivity)
• Buyer now has full due diligence access and knows your true numbers
• Buyer can identify soft spots and retrade
• You can't shop to anyone else even if they approach with a better offer

This is why you should negotiate hard on every LOI term before you sign:

1. Enterprise value: Push for higher. Buyers expect some negotiation — plant your flag high.
2. Cash at close: Push for higher percentage. Market range is 50-80%; push toward the upper end.
3. Escrow: Push lower. 10% is market; 15% is aggressive. Negotiate down where you can.
4. Exclusivity length: Push shorter. 60 days is better than 90. Tie it to milestones.
5. Employment terms: Push for protection. Non-compete is typically 3-5 years in scope — push back on anything materially longer or that goes beyond your industry and adjacent areas. Severance should be meaningful if they let you go.

LOI Terms at a Glance

Term	What It Means	What's Market (for $5-20M ARR SaaS)	Red Flag
Enterprise Value	Headline acquisition price	5-10x ARR depending on growth and retention	"Up to $50M" — implies downward adjustment rights
Cash at Close	Percentage of EV paid in cash at close	50-80% of EV	Below 50% without strong non-cash sweeteners
Rollover Equity	Stake in buyer's company post-close	10-25% of EV (PE deals) or 0% (strategic)	Above 30% unless buyer is public or well-capitalized
Earnout	Contingent consideration for hitting targets	Varies widely; value contingent consideration at a significant discount to face value	Binary cliffs (hit or miss with no gradation)
Escrow Holdback	Money held for 12-18 months for rep claims	10-15% of EV	Above 15% without RWI insurance; longer than 18 months
Exclusivity	How long you can't talk to other buyers	45-90 days	120+ days, or no sunset date tied to milestones
Financing Contingency	Deal is subject to buyer securing funding	Should not exist	Present in LOI; means buyer isn't serious
Working Capital Target	Expected cash/receivables balance at close	1-3 months of operating expenses	Undefined or subject to post-close dispute
Non-Compete	Restriction on what you can do post-close	3-5 years, your industry and adjacent areas	Materially longer than 5 years; worldwide scope without justification; restrictions on unrelated industries

Key Takeaways

1. The LOI is where the deal gets made. Everything after is paperwork and process. Negotiate hard before you sign.
2. Enterprise value is a headline. Net proceeds are what matters. Model the full bridge from EV to your bank account.
3. Your leverage is highest at LOI stage. Once you sign exclusivity, the buyer's leverage increases. Use your leverage before signing.
4. Binding vs. non-binding terms matter. Exclusivity and confidentiality are binding. Value and structure are (usually) not. Understand which term you're agreeing to on each line.
5. Watch for "up to" language, financing contingencies, and long exclusivity periods. These are the biggest red flags.
6. Structure matters, but cash at close matters more. A $50M deal with 50% cash might net you less than a $42M deal with 80% cash.