Letter of Intent Template for Acquiring a PEO Business

Parties and Transaction Overview

Identifies the buyer, seller, and target entity, and specifies whether this is an asset purchase or stock purchase. For PEOs, this section should also note whether the buyer intends to assume co-employer status for existing client worksite employees immediately upon close or following a transition period.

💡 Asset purchases are more common in lower middle market PEO deals because they allow buyers to exclude legacy liabilities — particularly open workers' compensation claims and ERISA compliance gaps. However, stock purchases may be preferred when the seller holds IRS CPEO certification under the entity, as transferring CPEO status through an asset deal can trigger re-certification timelines. Clarify this structural question early, as it drives every downstream term in the LOI.

Purchase Price and Valuation Basis

Establishes the total consideration and — critically for PEOs — defines the revenue metric on which valuation is based. All valuation references must be anchored to net administrative revenue (NAR) or adjusted EBITDA, never gross billings or total payroll processed.

💡 PEO sellers frequently present gross billing figures that can make the business appear 5–10x larger than its actual administrative revenue base. Insist on a clear, written definition of NAR in the LOI itself — don't leave this for the purchase agreement. A well-run lower middle market PEO with clean loss ratios, CPEO certification, and 90%+ client retention should command 4.5x–6.5x NAR. Businesses with concentration risk, no CPEO status, or poor workers' comp history should be priced at 3.5x–4.5x NAR.

Earnout Structure Tied to Client Retention

Defines the earnout mechanism, which in PEO acquisitions is almost universally tied to the retention of co-employment clients during the 12–24 months post-closing. This section must specify the retention measurement methodology, payment schedule, and what constitutes a client departure attributable to the transaction.

💡 Sellers should push hard to exclude client departures caused by buyer-initiated changes to pricing, benefits, or service teams from the retention calculation — this is the most common earnout dispute in PEO deals. Buyers should ensure the measurement period captures at least one full annual benefits renewal cycle, as PEO client churn most frequently occurs at open enrollment. A tiered earnout (e.g., full payout at 90%+ retention, partial at 80–90%, none below 80%) is more equitable than a binary threshold and reduces litigation risk.

Exclusivity and No-Shop Period

Grants the buyer an exclusive negotiating period during which the seller agrees not to solicit or entertain competing offers. This protects the buyer's investment in due diligence, which is particularly costly in PEO acquisitions given the regulatory and actuarial complexity involved.

💡 60–90 days is standard for PEO acquisitions given the complexity of reviewing client contracts, workers' comp loss runs, state licenses, ERISA filings, and CPEO certification documents. Sellers should resist exclusivity periods beyond 90 days without meaningful buyer milestones. Consider tying exclusivity extension rights to Buyer's demonstrated progress — for example, completion of financial due diligence or delivery of a draft purchase agreement.

Due Diligence Conditions and Access

Outlines the scope of buyer's due diligence investigation and the seller's obligation to provide access to records, personnel, clients, and technology systems. PEO due diligence is unusually broad and must specifically call out access to workers' comp loss runs, benefits carrier agreements, state licensing files, ERISA compliance records, and client contracts.

💡 Sellers should prepare a due diligence data room before the LOI is signed to accelerate the process and reduce exclusivity risk. The workers' comp loss run review is non-negotiable for buyers — adverse claims history or open tail liabilities can make an otherwise attractive PEO un-financeable under SBA 7(a) programs. Technology due diligence is increasingly important; buyers should assess whether the PEO runs on a licensed enterprise platform (e.g., Isolved, Paylocity, PrismHR) or a custom-built legacy system that would require expensive migration.

Closing Contingencies

Lists the specific conditions that must be satisfied before the transaction can close. PEO-specific contingencies must include verification of IRS CPEO certification, state licensing status, clean workers' comp loss ratios, and lender approval if SBA financing is involved.

💡 Loss ratio thresholds are highly negotiable but 65% net is a reasonable benchmark for a well-run small PEO. Buyers financing through SBA 7(a) should be aware that lenders will independently scrutinize workers' comp reserves and CPEO status — these conditions will surface in underwriting regardless of LOI language. Sellers should negotiate the MAC (Material Adverse Change) clause carefully to exclude general industry trends, economic conditions, or client departures resulting from buyer-initiated communications.

Seller Transition and Non-Compete Obligations

Establishes the seller's post-closing obligations including a transition assistance period, client introduction responsibilities, and non-compete and non-solicitation covenants. In PEOs, seller involvement in client retention is critical because co-employment relationships are often built on personal trust between the owner and HR decision-makers at client companies.

💡 A 6-month transition period is the minimum advisable in PEO acquisitions — 12 months is preferable when the seller is the primary client relationship manager. Non-compete periods of 3–5 years are standard and generally enforceable in this industry given the competitive sensitivity of client relationships. Sellers should negotiate for transition compensation beyond 90 days and push for clear limitations on what constitutes competitive activity, particularly if they plan to remain active in adjacent industries like benefits brokerage or payroll consulting.

Confidentiality and Non-Disclosure

Confirms that both parties are bound by confidentiality obligations governing the transaction, client data, employee information, and proprietary business details. Given that PEOs hold sensitive HR, payroll, and health data for thousands of worksite employees across their client base, confidentiality provisions must be unusually robust.

💡 If a standalone NDA has not been executed prior to the LOI, incorporate full confidentiality language directly into the LOI. PEO buyers must be especially careful about how client and employee data is handled during due diligence — sharing identifiable worksite employee data may trigger state privacy laws (e.g., CCPA, SHIELD Act) and HIPAA considerations if health plan data is involved. Use anonymized or aggregated data for initial financial review and only access identified records under specific data use restrictions.

Binding vs. Non-Binding Provisions

Clarifies which sections of the LOI are legally binding and which are expressions of intent. This is a critical protective provision for both parties given the complexity of PEO transactions and the length of the due diligence and negotiation process.

💡 Clearly separating binding from non-binding provisions prevents misunderstandings about what the LOI commits either party to. The exclusivity and confidentiality sections must be binding — these are the LOI's core legal functions. Buyers should avoid including binding purchase price language at the LOI stage since PEO financial due diligence frequently surfaces adjustments to NAR, EBITDA, and liability exposure that require price renegotiation.