Letter of Intent Template for Acquiring a Test Preparation Franchise

Parties and Transaction Overview

Identify the buyer entity, the seller (typically the franchisee, not the franchisor), the specific franchise unit(s) being acquired, the franchisor brand, and the nature of the transaction — almost always an asset purchase rather than a stock purchase to avoid inheriting unknown liabilities and to allow for a favorable goodwill allocation under SBA financing guidelines.

💡 Confirm early whether the seller owns a single unit or holds rights to multiple territories — some test prep franchisees have been granted development agreements covering contiguous markets. Define the specific assets being acquired including student enrollment records, curriculum materials licensed under the franchise agreement, equipment, leasehold improvements, and the assigned franchise agreement. Exclude personally owned vehicles, non-business receivables, and any liabilities unless explicitly negotiated.

Purchase Price and Consideration Structure

State the proposed total enterprise value, how it is calculated relative to seller's discretionary earnings (SDE), and how the consideration will be allocated across cash at closing, seller financing, and any earnout component. Test prep franchise deals typically close at 2.5x–4.5x SDE, with SDE commonly ranging from $150K to $500K for single-unit operators.

💡 Sellers of test prep franchises often overvalue their business based on peak enrollment years during SAT reform cycles or post-COVID rebounds. Push for SDE normalization that adds back owner-instructor compensation, personal health insurance, and one-time marketing spend — but also scrutinize years where owner involvement in teaching inflated revenue that a hired instructor cannot replicate. If the seller teaches a significant share of classes, a seller note or earnout creates alignment during transition. SBA lenders will require the seller note to be on full standby for the loan term.

Earnout Structure and Enrollment Milestones

Define how earnout payments are calculated, what metrics trigger payment, how enrollment is measured, and what obligations the seller retains during the earnout period. Enrollment-based earnouts are particularly appropriate in test prep businesses where seasonal peaks and student cohort cycles make trailing revenue a lagging indicator.

💡 Set enrollment thresholds based on the average of the two most recent full academic years — not peak years. Exclude enrollment attributable to new programs or marketing initiatives funded entirely by Buyer post-close. Require the seller to disclose any pre-sale promotional discounting or enrollment incentives that may have temporarily inflated student counts prior to LOI signing. Build in a definition of 'enrolled student' that matches the franchisor's standard reporting to avoid disputes.

Franchisor Transfer Approval Conditions

Formally condition the transaction on receipt of written franchisor consent to transfer the franchise agreement to the buyer, and define the process, timeline, cost allocation, and termination rights if approval is not obtained within a specified period.

💡 Franchise transfer fees for major test prep brands typically range from $5,000 to $25,000. Negotiate this as a seller cost since it is a cost of exiting their franchise relationship. Confirm the franchise agreement's remaining term — buying a unit with fewer than 3 years remaining without renewal rights is a significant risk, as the franchisor may not grant a new term to the incoming buyer. Ask the seller to provide Item 12 of the FDD to confirm territory exclusivity and whether the franchisor retains internet lead rights in the territory.

Due Diligence Period and Access

Define the length of the due diligence period, what materials the seller must provide, and the scope of Buyer's access to financial records, enrollment data, staff, the physical facility, and the franchisor's franchisee portal or reporting system.

💡 Enrollment seasonality is a critical due diligence focus. Request month-by-month enrollment data — not just annual totals — to understand how the business performs outside peak SAT and ACT testing windows (typically October and April). Validate instructor hours against payroll records to identify whether the owner-instructor role is documented separately. Review the FDD Item 19 Financial Performance Representation carefully: some franchisors provide unit-level financial data that can benchmark this unit's performance against system averages.

Exclusivity and No-Shop Provision

Prevent the seller from soliciting or entertaining competing offers during the due diligence and franchisor approval period.

💡 The franchisor transfer approval timeline often extends beyond standard LOI exclusivity windows. Build in automatic extensions tied to milestones — application submission and franchisor response receipt — so you don't lose exclusivity while waiting on a process outside your control. Sellers who resist extended exclusivity during the franchisor approval period may have other interested parties or may be testing the market.

Seller Transition and Training Obligations

Define the seller's post-closing commitment to train the buyer, introduce key instructor staff, facilitate parent and school community relationships, and support the seasonal enrollment cycle immediately following close.

💡 In test prep franchises, the seller's relationship with local school counselors, teachers, and parent networks is often the most valuable asset being transferred — and it is entirely intangible. A 6-month seller transition, ideally spanning at least one peak enrollment cycle (fall SAT season or spring ACT season), dramatically increases the probability of enrollment retention post-close. If the seller is the primary instructor, this is non-negotiable. Tie earnout payments to completion of transition milestones to create accountability.

Non-Compete and Non-Solicitation

Restrict the seller from opening or operating a competing tutoring or test preparation business within the franchise territory or soliciting staff and students following close.

💡 Many franchise agreements already contain post-term non-compete provisions binding on the franchisee. Review the existing franchise agreement carefully — the franchisor's non-compete may be broader or narrower than what you negotiate with the seller. In states with strict non-compete enforcement limitations (California, Colorado, Minnesota, Oklahoma), consult local counsel to ensure your protections are enforceable. Instructors who are not party to this LOI are not bound by it — consider requiring key instructor non-solicitation agreements as a closing condition.

Good Faith Deposit and Escrow

Define the earnest money deposit amount, escrow terms, and conditions under which the deposit is refundable or forfeited.

💡 Deposits for test prep franchise deals typically range from $10,000 to $50,000 depending on deal size. Given the extended franchisor approval timeline, ensure the deposit remains refundable until franchisor consent is received in writing. Sellers may push for a larger non-refundable deposit after due diligence completion — this is reasonable if you have confirmed all material due diligence findings, but resist forfeiting the deposit if franchisor approval is the only remaining open condition.

Governing Law and Binding Effect

Establish that the LOI is non-binding except for specific provisions, define governing law, and set the expected closing date.

💡 Non-binding LOIs are standard in small business M&A, but the carve-outs for exclusivity, deposit, and confidentiality are legally enforceable and critical. In test prep franchise deals, the target closing date should be set with the franchise transfer approval timeline in mind — plan for 90–120 days from LOI execution as a realistic close window. Coordinate your SBA lender's underwriting timeline with the franchisor's approval process so both are tracking in parallel rather than sequentially.