Engineering Firm LOI Template: Annotated Walkthrough

Asset vs. Stock Election: Make the Decision Before You Send the LOI

The LOI must state your deal structure preference. This is not a decision to defer to attorneys later — it shapes the entire negotiation and due diligence scope.

**Recommended language for an asset sale:**

*"Buyer proposes to acquire substantially all of the assets of Seller, including but not limited to equipment, tools, vehicles, customer contracts, customer relationships, intellectual property, goodwill, and the right to use the trade name [Firm Name], pursuant to a mutually agreed Asset Purchase Agreement. Buyer shall not assume any liabilities of Seller except those specifically enumerated in the APA, including current trade payables arising in the ordinary course of business not to exceed $[amount].'*

This language protects you from inheriting pre-close E&O liability, unknown tax liabilities, and pending litigation.

**When to consider a stock sale instead:** If the firm holds federal or state government contracts that represent more than 30% of revenue and formal novation would take 90+ days, a stock sale may preserve more deal value. In that case, insist on representations and warranties insurance coverage and expand your indemnification escrow to 15% of purchase price held for 36 months.

**The negotiating reality:** Most sellers prefer stock sales for tax treatment. Most buyers prefer asset sales for liability protection. The compromise is typically a price concession of 5–8% on a stock sale, or agreement to share R&W insurance premiums.

Purchase Price Structure: Base Price, Seller Note, and Earnout

The LOI should specify the total consideration and how it's structured. Ambiguity here causes renegotiation at the APA stage — which is expensive and erodes trust.

**Example purchase price structure for a $1.5M engineering firm deal:**

- Cash at close: $900,000 (from SBA 7(a) loan proceeds and buyer equity) - Seller note: $300,000 at 6.0% per annum, 5-year term, subordinate to SBA debt, 24-month standby provision per SBA requirements - Earnout: Up to $300,000, payable $150,000 per year for two years, contingent on EBITDA exceeding $350,000 in Year 1 and $375,000 in Year 2 - Total potential consideration: $1,500,000

**Earnout structure for engineering firms:** Tie earnouts to EBITDA, not revenue. Revenue is manipulable post-close; EBITDA requires the buyer to maintain the business properly to trigger the payment. Define EBITDA clearly in the LOI — gross profit minus operating expenses, excluding depreciation, interest, taxes, and owner's compensation above $150,000.

**Working capital peg:** State in the LOI that the purchase price assumes a normalized level of working capital (typically defined as current assets minus current liabilities). Final price adjusts at close based on actual working capital. Engineering firms often have significant WIP (unbilled work) that should be included in the working capital calculation.

PE and LS License Retention Earnout: The Engineering-Specific Clause

This clause doesn't appear in generic LOI templates. It's non-negotiable for engineering and surveying firm acquisitions.

In an asset sale, the seller's PE or LS license does not transfer to the buyer entity. The business's ability to continue operating depends on having a licensed professional available to sign deliverables. The license retention earnout structure ties a portion of the purchase price to the seller (and potentially other licensed employees) remaining engaged post-close.

**Recommended LOI language:**

*"Up to $150,000 of the earnout consideration described above shall be contingent upon the following license retention provisions: (a) Seller shall execute a 24-month consulting or employment agreement at a rate of not less than $[X]/year; (b) Seller's Professional Engineer/Licensed Land Surveyor certification (California License No. [XXX]) shall remain in active, unsuspended status throughout the 24-month period; (c) Seller shall be reasonably available to sign project deliverables and act as responsible charge for projects initiated pre-close for a period of 12 months post-close; and (d) Seller shall provide reasonable cooperation in transitioning signing authority to Buyer's designated licensed professional.'*

**Negotiating this clause:** Sellers sometimes resist earnouts tied to employment. Counter-position: frame it as paying them for value they're creating, not a performance requirement they might fail. A seller who stays engaged for 24 months at $130K/year plus a $150K earnout is receiving $410K in total post-close consideration. That's meaningful money and most sellers will accept structured earnout terms if the total consideration is right.

Government Contract Novation Contingency

If the target firm has government contracts, the LOI must address the novation process explicitly. This is the second most common deal complication after license continuity.

**Recommended LOI language:**

*"Closing is contingent upon the initiation (not completion) of the novation process for all material government contracts (defined as contracts representing more than 10% of trailing 12-month revenue). Buyer and Seller shall cooperate to prepare and submit novation packages to all relevant contracting agencies within 15 business days of LOI execution. In the event any material government contract is not successfully novated within 120 days of close, the purchase price shall be subject to an adjustment mechanism as follows: [specify adjustment formula or arbitration process].'*

**Why contingency on initiation, not completion:** Novation timelines are outside both parties' control — a federal contracting officer can take 90+ days even with full cooperation from both parties. Tying close to novation completion can indefinitely delay a deal. The better structure is to close, put the novation proceeds in escrow or create a price adjustment mechanism, and then release the escrow when novation completes.

**DBE/SBE certification:** If the seller holds Disadvantaged Business Enterprise or Small Business Enterprise certification, address whether the certification transfers or lapses upon change of ownership. Loss of DBE/SBE certification can disqualify the business from certain public agency work. Include a representation from the seller about certification status and transferability.

Due Diligence Period, Exclusivity, and Deposit

These terms are standard in any LOI but have specific calibration for engineering firm deals.

**Due diligence period:** 45–60 days is standard for a professional services acquisition with government contracts and licensing complexity. Don't agree to 30 days — you need time for license verification, E&O claims history review, equipment inspection, and government contract analysis. If the seller insists on 30 days, you can sign the LOI and accept that timeline, but front-load your diligence work immediately.

**Exclusivity:** Request 60–90 days of exclusivity from LOI signing. During exclusivity, the seller cannot market the business, negotiate with other buyers, or share information with other potential buyers. This is standard and sellers should agree without significant pushback. A seller who resists exclusivity is either already in parallel negotiations or not serious about closing.

**Good-faith deposit:** A good-faith deposit of $25,000–$50,000 is customary for deals in the $1M–$3M range. The deposit is typically held in escrow by a neutral party (title company or attorney). Define refund conditions precisely: deposit is refundable if (a) buyer terminates based on findings during due diligence that represent material adverse changes from seller's representations, or (b) seller fails to meet conditions precedent. Deposit is non-refundable if buyer terminates without a material due diligence finding.

**Break-up fee:** On larger deals ($3M+), consider a mutual break-up fee. If the seller walks after exclusivity begins, they owe buyer a fee covering documented deal costs. This protects buyers who spend $20K–$50K on attorneys, accountants, and appraisers only to have a seller back out.

• 45–60 day due diligence period for engineering/surveying deals
• 60–90 days exclusivity from LOI execution
• $25,000–$50,000 good-faith deposit in neutral escrow
• Clear refund/forfeiture conditions for deposit
• Seller confidentiality obligations during exclusivity
• Mutual non-disparagement provision
• Governing law and dispute resolution (AAA arbitration or court jurisdiction)

E&O Tail Coverage and Seller Representations

Engineering firm LOIs should address E&O tail coverage directly — most generic templates don't.

**Recommended LOI language:**

*'As a condition of closing, Seller shall procure and maintain errors and omissions insurance tail coverage (extended reporting period endorsement) for a minimum period of [36/48/60] months following the closing date, at a limit of not less than [$1,000,000] per occurrence and [$2,000,000] aggregate, covering all professional services rendered by Seller's business prior to the closing date. Evidence of tail coverage shall be provided to Buyer not less than 5 business days prior to closing.'*

**Key representations to include in the LOI:** Seller represents that (a) there are no pending or threatened E&O claims not disclosed in Seller's disclosure schedule; (b) all professional licenses held by employees are in good standing as of the LOI date and will be maintained through close; (c) all government contracts are in good standing with no cure notices, show-cause letters, or termination for default actions pending; and (d) financial statements provided to Buyer accurately represent the financial condition of the business in all material respects.

For the full due diligence process before you draft your LOI, the engineering firm due diligence checklist walks through every category.