Selling a SaaS business: LOI, due diligence and earn-out

Oscar

Axle sent a letter of intent. Two pages. Price, payments, dates. Nina wants to sign it tonight.

Alex Tutor

Not tonight. A letter of intent is mostly non-binding, but not entirely. Look for the clause that stops you talking to other buyers for a few months, and for confidentiality. Those usually do bind you.

Nina

Found it: ninety days of exclusivity.

Alex Tutor

This is the moment for a lawyer, not later. Axle has lawyers; you need one who has read deals like this before.

Oscar

Laura. She did the contracts for the distributor Nina used to work for. She's reading it this week.

Alex Tutor

Question 1

At what point should GarageDesk's founders bring in a lawyer?

Choose one answerAt the first phone call from any interested buyerBefore signing the letter of intentOnly after closing, to check the payment arrivedNever; a small deal doesn't need one

Alex Tutor

Axle will check you for six weeks. Check them too. Who have they bought before, and what happened to those products?

Oscar

Two companies. I called both founders. One says the product still runs and the team stayed. The other says Axle folded it into their own software within a year.

Nina

We also asked Axle directly. GarageDesk stays a separate product for at least two years, with a link to their parts catalog, and shop prices don't change in the first year. Laura wants all of that in the contract.

Alex Tutor

Now due diligence: the buyer checks that everything you claimed is true. Customer list, payments, contracts, the code. Keep running the business while it happens; a dip in MRR during the checks costs you.

Nina

They want the full list of car owners' phone numbers.

Alex Tutor

Those are your shops' customers, not yours to hand over before the sale. Give counts and anonymized samples, read-only. Full data moves only at closing, under the contract.

Oscar

And Laura found a problem: Ethan's contract doesn't say that the code he writes belongs to GarageDesk.

Alex Tutor

Common and fixable: a signed assignment of rights, done this week. Found late, that kind of gap can stop a deal.

Alex Tutor

Question 2

Match each thing Axle checks with what GarageDesk should provide.

Pick an answer for each row. Choosing an answer that is already used moves it to this row.

Revenue and costs
Choose an answer
Customers and churn
Choose an answer
Car owners' phone numbers
Choose an answer
Who owns the code
Choose an answer

Alex Tutor

The two million on top is an earn-out: paid only if MRR reaches 200,000 within a year after closing. By then Axle runs the company, and you don't control the budget, the prices or the team.

Nina

Laura's advice: ask for more at closing and a target we can actually reach. Axle agreed: five million at closing, one million if MRR reaches 190,000 within twelve months.

Oscar

And in January our 60 shops still at 600 a month move to 750. That alone takes MRR from 165,000 to 174,000.

Alex Tutor

Question 3

After the January price step GarageDesk's MRR is 174,000 UAH. By what percentage must it grow to reach the earn-out target of 190,000 UAH? Round to one decimal.

Your answer

Units: % (e.g. 12.5)

You

Five plus one is still six. Did they gain anything?

Alex Tutor

A lot. Weigh the uncertain part by how likely you think it is. The founders gave the old target about a 50% chance and the new one about 80%. Those are their own estimates, not facts.

Alex Tutor

\text{expected value} = \text{paid at closing} + p \times \text{earn-out}

p is the founders' own estimate of the chance the earn-out target is reached. The safest habit is to decide whether the closing payment alone is acceptable.

Oscar

The old offer: 4 + 0.5 × 2 = 5 million. Let me do the new one.

Alex Tutor

Question 4

The final offer is 5,000,000 UAH at closing plus a 1,000,000 UAH earn-out that the founders think has about an 80% chance. What is its expected value, in UAH?

Your answer

Units: UAH

Nina

Axle's analyst asked again for the phone numbers, “just to check the database is real”. I need to answer today without sounding like we're hiding something.

Alex Tutor

Be helpful and firm: offer another way to verify the same thing, and say when the full data moves.

Alex Tutor

Question 5Short answer · AI-checked task

Write Nina's reply to Axle's analyst (3–4 sentences), who asks for the full list of car owners' phone numbers during due diligence.

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Alex Tutor

The GarageDesk deal closes in January. Nina stays twelve months, Oscar six. Their story ends here, and yours starts. One more case, and it uses the whole course.

You

ClinicSlot again?

Alex Tutor

Hannah and Leo got an offer too. Theirs is less generous than it looks.

Alex Tutor

Question 6Case · AI-checked task

Advise Hannah and Leo on the offer (250–400 words).

ClinicSlot (booking and reminders for small dental clinics in Kharkiv) now has MRR 120,000 UAH. Monthly costs without the founders' pay are 45,000 UAH; churn is about 3% a month; no clinic brings more than 3% of MRR.

A dental equipment distributor sends a letter of intent:

3,600,000 UAH in total: 2,000,000 at closing and 1,600,000 if MRR reaches 240,000 within 12 months after closing;
90 days of exclusivity; Hannah stays 18 months;
before signing, it asks for the full list of patients' names and phone numbers “to assess the base”.

While preparing, the founders find two problems: the booking module was written by a freelancer whose contract doesn't transfer the code rights to ClinicSlot, and hosting has always been paid from Leo's personal card.

Use illustrative multiples of 2–4× ARR and 3–5× yearly owner earnings. Compute the value range, the multiple the certain part represents, and the offer's expected value with your own estimate of the earn-out chance. Then advise: what to fix before due diligence, how to answer the data request, what to negotiate, and whether keeping the company is a reasonable alternative.

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Alex Tutor

From a notebook at a Vinnytsia repair shop to a signed deal: every step was a decision made with their own numbers. That's the whole method. Use it on your own idea.

Alex Tutor

That’s the lesson. You answered every task — nicely done.

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