Letter of Intent Template for Acquiring a Financial Audit Firm

Parties and Transaction Overview

Identifies the buyer and seller entities, defines the subject of the transaction (asset purchase or equity purchase of the audit practice), and establishes the basic intent to proceed in good faith toward a definitive agreement.

💡 Asset purchases are strongly preferred in audit firm acquisitions because they allow buyers to exclude undisclosed liabilities, including any pending regulatory actions or peer review deficiencies. Sellers often prefer equity sales for tax treatment, so expect negotiation here. Confirm early whether the firm's professional liability tail coverage will be the seller's or buyer's responsibility post-close.

Purchase Price and Valuation Methodology

States the proposed purchase price, explains how it was calculated, and defines what revenue base was used for the multiple. Financial audit firms in the lower middle market typically trade at 0.8x to 1.4x trailing twelve-month gross revenue, with the multiple driven by client concentration, staff depth, and peer review history.

💡 Be specific about which revenue figure is being multiplied — trailing twelve months, average of three years, or run-rate. Audit firms with high nonprofit or governmental client concentrations may warrant a lower multiple due to rebidding risk. If the seller's peer review has any findings, negotiate a price reduction or additional escrow holdback. Buyers should avoid agreeing to a fixed total price before completing revenue concentration analysis.

Deal Structure and Payment Terms

Details how the total purchase price will be paid, including the split between cash at closing, seller financing, and earnout payments. Most financial audit firm deals include a revenue-based earnout to protect buyers against client attrition during the transition period.

💡 The earnout threshold is the most heavily negotiated term in audit firm acquisitions. Sellers prefer low retention thresholds (70–75%) while buyers want 85–90%. A tiered earnout that pays partial credit for partial retention is often the compromise. Seller financing typically ranges from 15–30% of purchase price. If an SBA 7(a) loan is used, seller notes must be on full standby for the SBA loan term, which sellers should understand before LOI signing.

Client Transition and Retention Obligations

Defines how client relationships will be transitioned, what introductions the seller will make, and how the earnout measurement period handles clients who do not renew or who leave due to non-buyer-controlled factors such as client business closure or merger.

💡 Carve-outs from the earnout base are critical for buyers. Without them, sellers face earnout penalties for client losses entirely outside their control. However, buyers should carefully define what constitutes a qualifying carve-out to prevent sellers from attributing all losses to excluded categories. Client introduction letters should be sent within 30 days of closing while the seller is still actively involved.

Non-Compete and Non-Solicitation Agreement

Restricts the selling CPA partner from competing with the acquired practice or soliciting transferred clients and staff for a defined period following closing. This is particularly important in audit firm acquisitions where the seller often holds personal client relationships.

💡 Three years is standard and generally enforceable in professional services acquisitions. Sellers sometimes push for geographic restrictions limited to the immediate service area rather than a mileage radius — this is reasonable for firms with remote clients. Confirm that the non-compete is tied to specific clients transferred, not just a blanket geographic restriction, as courts have found overly broad restrictions unenforceable. Consider including a liquidated damages clause for breach.

Transition Consulting Agreement

Defines the seller's post-closing role, compensation, and duration of involvement in managing client relationships, supervising audit engagements, and supporting staff during integration. This is one of the most important terms in reducing transition risk for buyers of audit firms.

💡 Sellers want a defined end date and a clean exit; buyers want flexibility to extend. A 12-month initial term with a mutual option to extend 6 months is a common compromise. Compensation during the consulting period should be credited against or separate from the earnout — clarify this explicitly to avoid disputes. If the seller is a key reviewer on governmental audits, ensure continuity through at least one full audit cycle post-close.

Due Diligence Access and Conditions

Defines the scope of due diligence the buyer will conduct, the time period allowed, and the key conditions that must be satisfied before the buyer is obligated to proceed to definitive agreement and closing.

💡 For audit firms, peer review documentation is non-negotiable due diligence — request all reports, findings, management responses, and corrective action plans. Revenue concentration analysis is equally critical: if one client represents more than 20% of revenue, this is a material risk that should affect price or earnout structure. Confirm whether engagement letters are assignable without client consent, as some engagement letter templates include change-of-control provisions requiring client acknowledgment.

Exclusivity and No-Shop Period

Prevents the seller from soliciting or entertaining other offers during the due diligence and negotiation period following LOI execution, giving the buyer time to complete diligence and negotiate definitive documents without competitive disruption.

💡 Sixty days is standard for lower middle market audit firm deals. Sellers should push for a reciprocal exclusivity provision requiring the buyer to proceed in good faith and notify the seller promptly if they intend not to proceed. Buyers relying on SBA financing should request a 90-day exclusivity window given SBA approval timelines.

Confidentiality

Obligates both parties to maintain confidentiality regarding the existence of the transaction, shared financial information, client data, and employee details. This section is typically binding even if the remainder of the LOI is non-binding.

💡 Client data is subject to CPA professional standards and state board ethics rules in addition to contractual confidentiality. Ensure the LOI acknowledges that client information shared in due diligence will be used solely for acquisition evaluation and cannot be retained or used if the deal does not close. This is a point of professional ethics, not just contract law, for licensed CPA buyers.

Binding vs. Non-Binding Provisions

Clearly delineates which sections of the LOI are legally binding and which represent non-binding statements of intent that will be replaced by the definitive purchase agreement.

💡 Make the binding/non-binding distinction explicit and unambiguous. In audit firm deals, sellers have occasionally argued that LOI purchase price terms were binding when buyers adjusted price following due diligence findings such as peer review deficiencies or unexpected client attrition. A clear non-binding disclaimer on price terms protects buyers' right to renegotiate based on diligence findings.