SaaS Letter of Intent (LOI): What It Covers and What Binds

Short answer: a letter of intent (LOI) in a SaaS acquisition is a short document, usually two to five pages, in which a buyer states the price, structure and conditions they intend to buy on, before either side spends money on diligence and lawyers. Most of it is deliberately non-binding, but a few clauses (exclusivity, confidentiality, expenses, governing law) are binding and enforceable, and those are the ones that can hurt you. Signing an LOI typically starts a 30 to 60 day exclusive period. Last updated July 2026. Educational only, not legal or financial advice.

What is a letter of intent in a business acquisition?

A letter of intent is the written handshake that turns an interested buyer into a real process. It sets out what the buyer proposes to pay, how the payment is structured, what is included in the sale, what has to be true for the deal to close, and how long they want the seller off the market while they check. It exists because full diligence and a purchase agreement cost both sides real money, and nobody wants to spend that before agreeing roughly what the deal looks like.

You will see the same document called an LOI, a term sheet, a heads of terms, or a memorandum of understanding. In small SaaS deals the labels are used interchangeably, and the name on the front page has no legal significance. What matters is what the clauses say and which of them are marked binding.

Is a letter of intent legally binding?

Mostly no, partly yes, and the split is intentional. The commercial terms (price, structure, earnout, what happens to the founder) are drafted as non-binding, so either side can walk away if diligence changes the picture. A defined set of clauses is drafted as binding and survives even if the deal dies. A well-written LOI says so explicitly, usually in a paragraph near the end titled something like "Binding effect."

Clause	Usually binding?	Why it matters
Purchase price and multiple	No	Can be renegotiated after diligence, and often is
Deal structure (cash, earnout, note)	No	Sets expectations, not obligations
Exclusivity / no-shop	Yes	You cannot talk to other buyers for the stated period
Confidentiality	Yes	Protects both sides' data, often mirrors the NDA
Expense allocation	Yes	Says who pays legal and diligence costs if the deal dies
Break fee (rare in small deals)	Yes	Real money changes hands if one side walks
Governing law and disputes	Yes	Decides where any fight happens
Closing conditions	No	Signals what would kill the deal, does not compel closing

A caution worth stating plainly: courts in some US states have found "non-binding" LOIs to create an enforceable obligation to negotiate in good faith, particularly where the language is sloppy or the parties behaved as though a deal existed. That is a lawyer question, not a template question, and it is the main reason to have counsel read even a short LOI before you sign it.

What goes in a SaaS letter of intent

Small SaaS LOIs are shorter than the corporate versions you will find online, because the deal is simpler. Here is what a serious one covers.

• Parties and the asset. Who is buying, who is selling, and whether this is an asset purchase (the code, domain, customer contracts, IP) or a stock purchase (the whole legal entity, including its history and liabilities). For sub-$5M SaaS, asset purchases are the norm, because buyers do not want to inherit unknown obligations.
• Purchase price and how it is calculated. Either a fixed number or a formula, for example a multiple of trailing twelve month ARR, stated with the ARR definition the parties are using.
• Structure. How much is cash at close, how much is a seller note, how much is an earnout, and what the earnout is measured on. Earnouts tied to revenue are far easier to verify than earnouts tied to profit.
• Working capital and cash treatment. Whether prepaid annual subscriptions transfer with the business, and who eats the deferred revenue. This is the single most commonly missed item in small SaaS deals and it can move real money.
• Founder transition. How many hours per week, for how many months, paid or unpaid, and whether a non-compete applies.
• Diligence scope and timeline. What the buyer will review and by when.
• Exclusivity period. The date the no-shop starts and ends.
• Conditions to close. Financing, key contract consents, code review passing, metrics confirming to within a stated tolerance.
• Binding effect clause. The paragraph that says which of the above actually binds.

How long should the exclusivity period be?

Thirty to sixty days is standard for a small SaaS deal, and 45 is a fair midpoint. Shorter than 30 rarely gives a buyer time to complete code and financial review. Longer than 60 hands the buyer a free option: they hold your business off the market while they decide, and you carry all the risk if they walk. Sellers should push for the shortest workable window and, if the buyer wants more, ask for an extension to be conditional on diligence being substantially complete rather than automatic.

Two protections are worth negotiating into the exclusivity clause. First, an automatic termination if the buyer does not deliver a draft purchase agreement by a stated date. Second, a clause ending exclusivity immediately if the buyer materially reduces their offer, which stops the retrade tactic described below from costing you another month.

The retrade: what happens when a buyer lowers the price after the LOI

Because the price in an LOI is non-binding, some buyers use diligence as a renegotiation. They sign at a headline number that beats the competition, take you off the market, then come back at week five with a list of findings and a lower offer, betting that you are too far in to restart. This is common enough that experienced sellers plan for it.

The defense is preparation, not paperwork. Retrades succeed when diligence uncovers something the seller could not evidence: revenue that does not reconcile to the bank, churn calculated generously, a key contract that does not actually transfer, undocumented code. If your numbers are verified before you sign, there is nothing to discover, and a price cut has to be argued on nothing. Sellers who run the SaaS due diligence checklist against themselves before going to market are dramatically harder to retrade. Getting from raw bookkeeping data to clean, presentable numbers is easier than it used to be, since you can now turn a bookkeeping export into board-ready financial statements in an afternoon rather than paying for a rush engagement.

Letter of intent vs purchase agreement

These are two different documents that do two different jobs, and confusing them costs people money.

	Letter of intent	Purchase agreement
Length	2 to 5 pages	20 to 60+ pages plus schedules
Binding	A few clauses only	Fully binding
When	Before diligence	After diligence, at close
Contains	Price, structure, exclusivity, conditions	Reps and warranties, indemnities, covenants, closing mechanics
Legal cost	Low, often a few hours of review	The main legal spend of the deal
Who drafts	Usually the buyer	Usually the buyer's counsel

Should a seller accept the buyer's LOI template?

Buyers draft the LOI in almost every small deal, and their template will be buyer-favorable by default: long exclusivity, wide diligence, vague price language, and conditions loose enough to walk on. That is not bad faith, it is just whose lawyer wrote it. Sellers should expect to redline it, and a buyer who refuses any changes to a supposedly non-binding document is telling you something useful about how the rest of the deal will go.

The three edits that matter most for a seller are: shorten exclusivity and make extensions conditional, tighten the price language so the ARR definition is fixed rather than open to reinterpretation, and narrow the closing conditions so "buyer satisfaction in its sole discretion" becomes something objective. Everything else is usually worth conceding to keep momentum.

Do you need a letter of intent for a small SaaS deal?

For anything above roughly $50,000, yes. Below that, the cost and delay of formalizing terms can exceed the risk, and many micro deals go straight from a written offer in the marketplace messaging to an asset purchase agreement and an escrowed transfer. Above that threshold, the LOI pays for itself simply by forcing both sides to agree what the number means before anyone spends on lawyers. Discovering in week six that you meant ARR including annual prepayments and the buyer meant MRR times twelve on active subscriptions only is an expensive way to learn the value of two clear paragraphs.

What happens after the LOI is signed

Diligence starts, and it runs on a clock. The buyer requests access to financials, billing and analytics data, the codebase, customer contracts and any vendor or model provider agreements. Expect two to six weeks for a small SaaS. Their goal is to confirm that the metrics in your listing reconcile to primary sources, that the code is what you say it is, and that everything they are buying can legally transfer to them.

If diligence confirms the story, the buyer's counsel produces a purchase agreement reflecting the LOI terms, the parties negotiate reps, warranties and indemnity caps, then funds go to escrow and the assets transfer. If diligence surfaces genuine problems, the price or structure gets adjusted, or the deal ends. Either outcome is normal. What should not happen is a surprise, and that is the whole reason the LOI exists.

Where to go from here

If you are preparing to sell, price the business before you invite an LOI: an offer is only high or low relative to a defensible range, and the SaaS valuation calculator gives you that range using the ARR multiple method buyers apply. Then read how the wider process runs end to end in our guide to selling your SaaS business, and see how the market actually prices deals like yours in the SaaS M&A overview. If you are on the buy side, the buying a SaaS business guide covers what to put in your own LOI. On Buyouts, every listing arrives with verified MRR, ARR, growth and churn already confirmed, which is the fastest way to make the gap between LOI and close boring.