Many sellers believe the deal is done once they sign a letter of intent. After months of preparation, marketing and negotiation, a buyer has put a price and terms in writing. It feels like the finish line.
In reality, that is when the real work begins. The letter of intent sets the framework for a deal, but the buyer still has to confirm that the business is what it appears to be. That confirmation is called due diligence, and it is one of the heaviest lifts in the entire sale process.
Where the LOI falls in a sale
A typical sell-side process moves through four phases. The letter of intent arrives at the end of the third. Everything that follows, from due diligence to the definitive purchase agreement to closing, still has to happen before the deal is done.
Information gathering
Set the seller’s goals, review legal, accounting and tax considerations, prepare the company for sale and build the marketing materials.
Initial marketing
Research buyers, distribute a teaser and the confidential information memorandum, collect indications of interest and hold management presentations.
Letters of intent
Answer follow-up questions, solicit and negotiate letters of intent, and select the final buyer.
LOI signed ✓
Due diligence and closing
Open the data room, work through the buyer’s due diligence, negotiate and finalize the definitive purchase agreement, make any regulatory filings, and close.
The four phases of a typical sell-side process. A typical timeline runs between six and nine months from start to close.
Nine workstreams, often at the same time
Due diligence is not a single review. It is a set of separate, often overlapping workstreams, each run by a different specialist on the buyer’s side, and each with its own list of questions for the seller.
Legal structure, material contracts, licenses and permits, regulatory matters, and pending or potential liabilities.
Income tax filings, state and local taxes, sales and use tax, and confirmation that all liabilities have been paid.
Historical and projected performance, working capital, quality of earnings and key accounting policies.
Day-to-day operations, processes and systems, how efficiently the business converts inputs to outputs, and whether it can scale.
IT infrastructure, cybersecurity, data management, software systems and related risks.
The employee roster, compensation and benefits, retention of key people, and HR policies and practices.
Policies, coverage limits and claims history, including workers’ comp, general liability and property.
Real estate and leases, environmental matters, structural condition and required capital expenditures.
Top customers, contract terms, concentration and attrition risk, and the stability of key relationships.
Every workstream comes with its own list of documents and questions.
A handful of typical requests shows the level of detail buyers expect. Multiply them across nine workstreams, add follow-up questions on every answer, and the scale of the job becomes clear.
Workers’ compensation payroll for the current policy year, by state and class code
A list of employees by title, with wages and years of service
Employee policies and handbooks, including the performance review policy
The top 10 to 20 customers in each product line, and each one’s percentage of total sales
Environmental and structural reports, appraisals and leases
Why it is so hard to do alone
Owners who try to manage due diligence on their own usually discover the same problems.
Due diligence lands on top of your day job. If performance slips while you are buried in requests, the buyer will notice, and it can put the price or the deal itself at risk.
Several workstreams run in parallel, each with its own deadlines and follow-up questions. Keeping track of what was asked, what was sent and what is still open is a job in itself.
Most of what is agreed in a letter of intent is non-binding. What due diligence turns up can reopen the price and terms, and the definitive purchase agreement still has to be negotiated line by line.
Having every decision you have made questioned by a stranger is hard. Fatigue and frustration can lead to rushed answers or concessions you would not otherwise make.
A successful sale takes a team
Strategy and execution are an integrated process. A well-run sale brings together several professionals, each with a defined role, and someone has to keep all of them moving in the same direction.
- Evaluates strategic alternatives
- Helps identify potential buyers
- Provides due diligence material
- Leads management presentations
Investment banker
- Values the business
- Prepares the buyer list and marketing materials
- Leads the sale process and negotiations
- Evaluates proposals
- Evaluates the sale process and deal structure
- Prepares and reviews acquisition documents
- Handles trust and estate planning
- Identifies regulatory issues and assists in negotiations
- Examines and refines the transaction structure
- Identifies tax implications
- Provides materials for due diligence
- Advises on liquidity and retirement planning
- Advises on investment alternatives
- Helps prepare options for minimizing taxes
- Lender, insurance representative, environmental consultant
- Provide input on key diligence items
- Support execution as needed
What an experienced advisor brings
An investment banker’s value in due diligence starts long before the letter of intent is signed.
Legal, accounting and tax issues are reviewed in the first phase, so problems are found and addressed before a buyer finds them.
Documents are gathered and organized ahead of time, so requests can be answered quickly and consistently.
The advisor tracks requests, keeps the timeline moving and coordinates your attorney, accountant and other professionals, so you can keep running the business.
When diligence findings come up, an experienced negotiator puts them in context and protects the value you agreed to in the letter of intent.
Start preparing before you need to
The best time to prepare for due diligence is before a buyer is involved. Reviewed or audited financials, organized contracts and leases, a current employee roster and a clear picture of your customer relationships make the process faster and give buyers fewer reasons to revisit the deal.
How we can help
At Windward Advisors, we prepare clients well before they go to market, run the sale process, and manage due diligence from the letter of intent through closing. Through Cornerstone Valuation, we help owners understand what their company is worth before the first buyer asks.
If a sale is on your horizon, even a few years out, a conversation now can make the work after the letter of intent far more manageable.