Letter of Intent Template & Guide for Acquiring a Background Screening Company

1. Identification of Parties and Business

Clearly identify the buyer entity, seller entity, and the specific business being acquired. For background screening companies, specify whether the acquisition is structured as an asset purchase or stock purchase, as this has significant implications for inheriting FCRA litigation exposure, data vendor contracts, and state licenses.

💡 Asset purchases are strongly preferred by buyers acquiring background screening companies due to the risk of inheriting undisclosed FCRA class action exposure, outstanding consumer disputes, or state regulatory violations. Sellers often prefer stock sales for tax efficiency. If a stock structure is agreed upon, the buyer should negotiate robust indemnification provisions and escrow holdbacks specifically covering pre-closing regulatory and litigation liability. Confirm that the buyer entity is properly structured before the LOI is signed if SBA financing is anticipated, as lender requirements will dictate entity type and ownership thresholds.

2. Purchase Price and Valuation Basis

State the proposed purchase price, the valuation methodology used to arrive at it, and the financial metric upon which it is based. Background screening companies are typically valued on a trailing twelve-month or normalized EBITDA multiple, with adjustments for owner compensation, one-time expenses, and non-recurring revenue.

💡 The 4x–7x EBITDA range for background screening companies is wide because compliance posture, technology quality, and client stickiness dramatically affect risk-adjusted value. Buyers should anchor the LOI at the lower end of the range and build in explicit price adjustment triggers tied to the specific risk factors of the business — particularly client concentration and regulatory history. Sellers with clean FCRA compliance programs, sub-5% annual churn, and proprietary ATS integrations have legitimate grounds to defend multiples at the higher end of the range. Always define 'adjusted EBITDA' in the LOI to avoid disputes during diligence over add-backs related to owner salary normalization, data vendor contract renegotiations, or one-time technology investments.

3. Deal Structure and Financing

Describe how the transaction will be funded, including equity, debt, seller financing, and any earnout components. Background screening acquisitions commonly use SBA 7(a) loans, seller notes, and earnouts tied to client retention milestones.

💡 SBA lenders will require the seller note to be on full standby for at least 24 months, meaning sellers cannot receive seller note payments during that period. Sellers should factor this into their liquidity planning. Earnouts in background screening deals are most effective when tied to specific, objectively measurable client retention metrics rather than total revenue, because screening revenue fluctuates with client hiring volume. Define 'retained revenue' precisely — whether it means same-client revenue at any volume or revenue within a specified band of prior-year levels. Sellers should push back on earnouts that are entirely within the buyer's operational control post-closing, such as pricing decisions or sales resource allocation.

4. Due Diligence Scope and Timeline

Define the specific diligence workstreams the buyer intends to conduct, the timeline for completion, and the access the seller must provide. Given the regulatory complexity of background screening, diligence scope should explicitly cover FCRA compliance, data vendor agreements, and cybersecurity.

💡 FCRA compliance diligence is the single most important and often most underestimated workstream in a background screening acquisition. Buyers should engage outside counsel with consumer financial law expertise — not general M&A counsel — to conduct this review. Request the complete consumer dispute log for the trailing 36 months, all adverse action notice templates currently in use, and any correspondence from the Consumer Financial Protection Bureau or state attorneys general. Data vendor agreements often contain assignment restrictions that require consent from credit bureaus or court search networks upon change of control — identify these early, as delays in obtaining consent can hold up closing. Cybersecurity diligence should include a penetration test or at minimum a documented SOC 2 compliance assessment given the sensitivity of PII handled by the business.

5. Exclusivity

Grant the buyer an exclusive negotiating period during which the seller cannot solicit or entertain competing offers. This protects the buyer's investment in diligence while providing the seller assurance that the buyer is committed to the process.

💡 Sixty days is a reasonable exclusivity window for a background screening company of this size given the depth of FCRA and technology diligence required. Sellers should resist exclusivity periods exceeding 75 days without a demonstrated financing commitment from the buyer. Buyers using SBA financing should have a lender pre-approval in hand before requesting exclusivity, as SBA processing timelines can extend closing beyond the exclusivity window if not anticipated. Consider building in an automatic 15-day extension if both parties are actively negotiating in good faith and diligence is substantially complete.

6. Representations and Pre-Closing Covenants

Identify the key seller representations that underpin the purchase price and the operational covenants the seller must observe between LOI execution and closing to preserve business value.

💡 The FCRA and regulatory representations are the most heavily negotiated provisions in background screening LOIs because they directly affect indemnification exposure. Sellers will resist broad representations about regulatory compliance; buyers should push for specific representations tied to documented evidence — the audit log, dispute resolution records, and absence of pending claims. The client concentration cap and recurring revenue threshold should be stated as conditions to closing, not merely representations, so that a breach gives the buyer a clear contractual right to reprice or walk away. The pre-closing covenant prohibiting material contract modifications is critical — sellers have been known to renegotiate favorable pricing with key clients post-LOI in ways that damage the business's value.

7. Allocation of Purchase Price

Provide a preliminary framework for how the purchase price will be allocated among asset classes for tax purposes. This is particularly relevant in asset purchases where buyer and seller tax interests diverge significantly.

💡 Sellers in background screening transactions typically prefer allocations that maximize goodwill (taxed at capital gains rates) while buyers prefer allocations to customer relationships, technology, and non-compete agreements (amortizable over 15 years). The technology platform allocation is particularly contested in background screening deals — a proprietary screening platform with deep ATS integrations has significant independent value, and buyers should not underallocate to this asset class as it provides meaningful tax amortization. Non-compete allocations should be calibrated to the seller's realistic geographic and vertical competitive threat, typically covering a 3–5 year period and the Company's specific service verticals.

8. Non-Compete and Transition Services

Define the scope and duration of the seller's non-compete obligations and the transition assistance the seller will provide to ensure continuity of client relationships and compliance operations post-closing.

💡 Client relationship transition is the single greatest post-closing risk in background screening acquisitions because screening relationships are often personal — built on trust between an account manager or founder and the HR director at the client company. The non-compete scope should explicitly cover tenant screening and drug testing coordination if the Company offers these services, as sellers have been known to restart adjacent businesses outside an overly narrow non-compete definition. The 12-month consulting period is appropriate for founder-operated businesses; for larger teams with existing account management infrastructure, 6 months may suffice. Tie a portion of the earnout to seller cooperation in client retention activities to align incentives during the transition period.

9. Confidentiality

Establish mutual obligations to keep the terms of the LOI and all diligence materials confidential, protecting both the seller's business relationships and the buyer's acquisition strategy.

💡 Confidentiality is especially important in background screening company sales because clients — particularly large employer or staffing agency accounts — may become anxious about data security and compliance continuity if they learn of an ownership change before it is officially announced. Employees with client-facing roles, particularly compliance officers and account managers, are at elevated risk of being recruited by competitors if word of a sale leaks. Sellers should insist on a mutual NDA if one has not already been executed, as buyers will have access to sensitive PII handling processes and data vendor pricing during diligence.

10. Binding and Non-Binding Provisions

Clearly distinguish which provisions of the LOI are legally binding and which are expressions of intent subject to further negotiation and definitive documentation.

💡 The binding/non-binding distinction is not merely a formality — courts have in some instances found non-binding LOIs to create enforceable obligations where the language was ambiguous. Make the non-binding provisions unambiguous. Buyers should ensure the exclusivity, confidentiality, and ordinary-course operating covenant provisions are explicitly designated as binding. Sellers should resist any language that could be interpreted as a binding obligation to consummate the transaction at the stated price, as diligence may reveal material issues that justify repricing or termination.