Letter of Intent Template for Acquiring an HR & Payroll Services Business

Parties and Transaction Overview

Identifies the buyer entity, seller entity, and the structure of the proposed transaction — whether an asset purchase or stock purchase. For HR and payroll businesses, asset purchases are most common in the lower middle market because they allow buyers to avoid inheriting unknown payroll tax liabilities or E&O exposure. Stock purchases may be preferred when client contracts contain assignment restrictions or change-of-control clauses that would trigger renegotiation.

💡 Sellers operating as S-corporations should request that buyers seriously consider a stock purchase if the business has long-term client contracts containing assignment restrictions, since triggering a consent process across 50 or 100 small business clients can jeopardize deal momentum. Buyers should push back by requesting indemnification escrows sized to cover potential payroll tax liability look-back periods of at least three years if a stock purchase is agreed.

Purchase Price and Valuation Basis

States the proposed purchase price, the EBITDA or revenue multiple applied, and the baseline financial metrics on which the offer is based. HR and payroll services businesses in the lower middle market typically trade at 4x–7x EBITDA depending on revenue quality, client retention, and technology infrastructure. The LOI should clearly state the trailing twelve-month EBITDA figure used and whether any adjustments for owner compensation normalization or one-time expenses have been applied.

💡 Sellers should push to have the EBITDA definition and add-back methodology agreed upon in the LOI itself rather than left to due diligence interpretation. Common disputes arise around whether owner health insurance, personal vehicle expenses, and above-market officer salaries are legitimate add-backs. Buyers should insist that the stated multiple applies only to recurring revenue and that any project-based or one-time revenue be excluded from the EBITDA base used to calculate final purchase price.

Deal Structure and Consideration

Breaks down how the total purchase price will be paid, including cash at close, seller note, earnout, and any rollover equity. HR and payroll services acquisitions in this size range commonly use SBA 7(a) financing with 10–20% buyer equity, a 5–15% seller note, and a performance-based earnout tied to client retention. Sellers should understand that the earnout in this industry is almost always tied to client revenue retention rather than EBITDA growth, because client attrition is the primary post-close risk for buyers.

💡 Sellers should negotiate for earnout measurement on a revenue retention basis rather than EBITDA, since EBITDA earnouts in service businesses are easily manipulated by buyer cost allocations post-close. Sellers should also push for a floor earnout payment of 50% if retention falls between 80% and 90%, rather than a binary all-or-nothing structure. Buyers using SBA financing must confirm with their lender that the seller note structure complies with SBA standby requirements, which typically prohibit seller note payments during the first 24 months of SBA loan repayment.

Representations Regarding Recurring Revenue

Establishes the buyer's reliance on specific revenue quality representations made by the seller, including the percentage of revenue under contract, average contract term, and auto-renewal provisions. This section is particularly important in HR and payroll services because revenue can appear recurring but actually consist of month-to-month arrangements that carry no contractual commitment.

💡 Buyers should request a client-by-client revenue schedule as an exhibit to the LOI itself, not just during due diligence. Seeing the actual concentration and contract structure before exclusivity is granted allows buyers to price the risk accurately. Sellers with high client concentration should proactively disclose this and be prepared to accept a lower initial cash component offset by a larger earnout tied to retaining those key accounts post-close.

Compliance and Liability Representations

Requires the seller to disclose the status of payroll tax filings, IRS notices, state agency audits, and any errors and omissions claims. Payroll tax liability is one of the most significant hidden risks in an HR and payroll services acquisition because the IRS can assess trust fund penalties against successor entities or key individuals in certain circumstances. This section should trigger an immediate compliance audit as part of due diligence.

💡 Sellers should treat this section as an opportunity to surface and resolve any open issues before a buyer finds them. Undisclosed payroll tax notices discovered during due diligence are a leading cause of deal re-trades and price reductions. Buyers should budget for an independent payroll tax compliance review costing $5,000–$15,000, as the cost is negligible relative to the liability exposure of inheriting unresolved IRS issues.

Technology and Software Infrastructure

Identifies the core payroll and HR software platforms used to deliver services, establishes ownership of any proprietary tools, and addresses transferability of third-party software licenses. Buyers evaluating a roll-up strategy need to understand whether the target's technology stack is compatible with the acquiring platform or will require costly migration.

💡 Buyers conducting a platform roll-up should assess whether the target's technology stack creates integration costs that reduce effective purchase price. If the target runs on a legacy payroll engine incompatible with the buyer's platform, the cost to migrate clients — including client attrition risk during migration — should be modeled and may justify a price reduction of 0.5x–1.0x EBITDA. Sellers who have invested in modern, integrated platforms such as those built on Paylocity, Paychex Flex, or similar should highlight this as a value driver in the LOI negotiation.

Exclusivity and No-Shop Period

Grants the buyer an exclusive negotiating period during which the seller agrees not to solicit or entertain competing offers. In HR and payroll services acquisitions, a 45–75 day exclusivity period is standard given the complexity of the due diligence required, particularly around compliance history, client contract review, and technology assessment.

💡 Sellers should resist exclusivity periods longer than 60 days without a clearly defined due diligence timeline and milestone obligations on the buyer's side. An open-ended exclusivity period with no buyer milestones allows buyers to conduct extended due diligence that effectively takes the business off the market without committing to close. Buyers should propose a structured due diligence timeline with clear deliverable dates to justify the exclusivity window they are requesting.

Conditions to Closing

Lists the material conditions that must be satisfied before the transaction can close, including due diligence completion, SBA loan approval, key employee retention, and any required client consents. HR and payroll services transactions may require notifying or obtaining consent from key clients if contracts contain assignment or change-of-control provisions, which can be a deal-timing risk.

💡 Sellers should push to limit client consent requirements to only those contracts that explicitly require it, since requiring blanket client notification pre-close can create unnecessary attrition risk. Buyers should structure the condition around revenue retention percentage rather than requiring consent from every client individually. The key employee retention condition is particularly important in HR and payroll services — buyers should identify which employees own client relationships and ensure those individuals are committed to stay before closing.

Transition and Seller Consulting

Defines the seller's post-closing obligations to support client relationship transfer, staff training, and operational continuity. Given the relationship-driven nature of HR and payroll services, a meaningful transition period is essential to preserving client retention and the earnout baseline.

💡 Sellers should negotiate for the transition consulting fee to be paid regardless of whether the buyer actively utilizes the seller's time, since the seller is forgoing other employment opportunities during this period. Buyers should tie at least a portion of the earnout payment to active seller participation in client introductions during the first 90 days post-close, as this is the period when client attrition risk is highest. Both parties should define in writing which client relationships the seller is specifically responsible for transitioning.