When you're selling your SaaS, you'll likely receive offers from potential buyers in the form of letters of intent (LOIs). An LOI is a document that outlines the key terms of the proposed deal. While an LOI is not a legally binding document, it's important to evaluate any offer that comes your way carefully. Following these 6 tips when evaluating a SaaS LOI agreement will put you in the best position to experience a life-changing exit.
What to Look for When Evaluating a SaaS LOI Agreement
Check the buyer’s references and reputation.
All LOIs aren’t created equal, so Founders must do their research on each buyer before getting too excited about a deal. The last thing you want is to accept an LOI, tell your team about it, and start planning for your future in the time between an LOI and close —just for the buyer to come back and attempt to renegotiate terms or lower the price because of something they found in the due diligence process. Unfortunately, this scenario often happens.
Be aware of retrading.
In the acquisitions world, we call this “retrading.” It essentially means the buyers attempt to close on different terms than initially presented in the LOI. It frequently happens when the buyer wants to lower the price by highlighting risks found in the due diligence process, even as the LOI closing date approaches. Traditional private equity firms are notorious for this practice. SureSwift never uses retrading, and our LOI terms are our closing terms.
Get in touch with Founders who have worked with the buyer before.
So, knowing that many buyers don’t stick to their LOI terms, how do you ensure you get the best deal? Doing your homework and checking the buyer’s references is a must. If you get a chance to speak with Founders who have previously sold to the buyer, come prepared with plenty of questions. You’ll want to know their experience before, during, and after the sale. Did the closing process go according to plan, or were there significant changes? Did anything unexpected come up?
And finally, it’s a good idea to simply ask the buyer if they typically close on different terms than what’s outlined in the LOI, and if so, when does this happen?
By now, you might’ve guessed that it’s standard for LOI terms and closing terms to mismatch.
At SureSwift, we buy a lot of great bootstrapped SaaS businesses from Founders and take great pride in the fact that we pay cash and close on the terms of the LOI.
Make sure the buyer has cash.
One of the most exciting parts about getting ready to sell your SaaS is receiving a valuation. But some Founders aren’t aware that many companies (particularly venture capital and private equity rounds) don’t offer an all-cash transaction. Instead, they will offer an alternate payment structure, such as an earnout.
In our experience, bootstrappers are typically looking to sell in a shorter time frame, so they can move on to their next project or take some time off. In this case, an all-cash offer is the way to go.
Ask for proof of funds.
Regardless of the buyer’s proposed deal structure, it’s good to ask for proof of funds (yes, this is totally okay), especially if it’s an individual buyer. Many acquirers boast, but they might need a loan to purchase your business. So, it’s critical to know if they have cash on hand. Even a strategic acquirer will sometimes write an LOI, but they may need to acquire funds from their investors to close the deal.
Note: If a strategic acquirer wants to use stock to buy your business, you need to reverse the due diligence and understand everything about their stock, capital structure, and business. Otherwise, you won’t know if it has any future value.
Don’t be shy about asking buyers questions.
In addition to reaching out to references and doing your research on a company, one of the best ways you can feel secure and satisfied with an LOI is simple — ask the buyer a ton of questions about it. This is how you will build trust, and the right buyer will be open, honest, and willing to provide you with thorough information. A professional (and serious) acquirer will welcome all your questions, no matter how small, and work hard to provide you with solid answers.
Depending on the offer, you might consider asking questions about:
- The transition period (more on that in a minute)
- The deal structure
- The plans for your current team (if you have one)
Understand the details of the transition period.
Typically, when a Founder goes to sell, they already have plans for what they want to do after their exit, so the transition period after closing can make or break a deal. An LOI should outline all the details of this period, from how involved the buyer wants you to be to how quickly the transition will happen. Before accepting an LOI, understand the fundamentals so you can plan accordingly. These details include how many hours you’ll work a week, who you’re working with, how you’ll work with them, and communication frequency.
Confirm the plans they have for your current team.
Depending on how the buyer structures their company, they may want to hire your team members after the sale. And for many bootstrappers, this is one of the most important aspects of a deal, especially if you have team members who have been with you since the early days of your SaaS.
When reviewing your LOI, pay close attention to this part of the document and note any questions you have — no matter how small. One of the worst things that can happen during an exit is for your team to think there will be opportunities with the buyer when in fact, the buyer has no plan to use your team members at all. As a result, many Founders will ask us about our plans to utilize their team before sending them an LOI.
Pro tip: If you get the chance to talk to any former Founders that have sold to the buyer, ask them how the acquisition impacted their team members and what the company did to accommodate them.
Pay attention to expectations on exclusivity and due diligence.
Usually, an LOI includes a timeline for the rest of the due diligence process and exclusivity — the period where they can dig into your business, and you shouldn’t consider other offers.
Remember, if you are going exclusive, but the buyer does not have the funds in place, their financing risk could significantly delay your exit. You might have to start all over again, so you should ask for proof.
As far as due diligence goes, if the LOI does not state what you need to have prepared for the buyer in terms of metrics on your business, ask. Digging through your databases and finding all the answers they are looking for can take time, so the sooner you know what to look for, the better.
With so much at stake, ensure you have the right people in your corner when selling your SaaS business. Above all, make sure you trust the buyer and trust that the LOI won’t change upon closing. Finally, have an experienced eye to evaluate your LOI to review key points and avoid potential problems. If necessary, your legal counsel can help negotiate better terms on your behalf.
Receiving an LOI is a huge milestone for your SaaS business, but it’s also just the beginning. Now comes the hard part — evaluating whether or not to move forward with the deal.
Have any questions about evaluating a SaaS LOI or selling your online business? Feel free to send us a message or reach out to me on Twitter. We’re always happy to chat with Founders and answer questions.
The SaaS Due Diligence Checklist to Ensure a Successful Deal
If you’re an acquirer or looking to sell your SaaS business, our team at SureSwift Capital is here to help guide you through this process and answer any questions you may have. Following the tips outlined in this checklist and having the proper documentation in place can save yourself time and stress during the due diligence review process.
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