Nine Questions to Ask Any Buyer Before You Sign an LOI

Signing a letter of intent feels like progress. Mechanically, it is the moment you hand over most of your leverage: you stop talking to other buyers, the clock starts, and every subsequent negotiation happens with only one party in the room.

That makes the fortnight before signing the most valuable fortnight in the whole process. Here is what to spend it on.

1. Where is the equity coming from, specifically?

Not "we have a network of investors." Names, or at least: how many capital partners, what size cheque each typically writes, and whether they have seen this deal.

Good answer: three or four specific relationships, the shape of their participation, and confirmation they have reviewed the materials.

Bad answer: anything abstract. Vagueness here is the single most reliable predictor of a deal that dies in week ten.

If you are dealing with an independent sponsor, this question is not an insult — it is the question, and a well-prepared sponsor will answer it before you ask. If you are dealing with a fund, the equivalent question is how much dry powder remains and whether this deal needs co-investment.

2. Who is the lender, and have you spoken to them about this deal?

There is a large difference between "we have banking relationships" and "we have a term sheet from a named lender based on your actual financials."

Ask what leverage they are assuming and what happens if the lender comes back with less. Over-levered structures are the second most common cause of a retrade, because when the debt shrinks the buyer needs the price to shrink with it.

3. What were your last three closings, and can I speak to one of those sellers?

The most useful fifteen minutes of your entire process is a phone call with someone who sold to this buyer two years ago. Ask them: did the price change after the LOI? Did the buyer do what they said about the team? Would you do it again?

A buyer who cannot produce a single reference is either new — which is fine if they say so — or has references who would not be flattering. Both are worth knowing.

4. What is your close rate on signed LOIs?

A blunt question, and a revealing one. Everybody has deals that fall apart for legitimate reasons. A buyer who says "eleven of thirteen, and here is what happened with the two" is being straight with you. A buyer who claims a perfect record has either done very few deals or is not telling the truth.

5. What would have to be true in diligence for you to change this price?

This is the retrade question, asked in advance, and it is the most useful one on the list.

Good answer: a short, specific list. Quality of earnings differing from the presented numbers by more than a stated threshold. Undisclosed customer losses. Environmental or litigation surprises. Working capital materially off the normalised level.

Bad answer: "we don't retrade." Everybody adjusts for genuinely new information. What you want is a buyer who will define in advance what counts as new information — because that definition is the difference between a fair adjustment and a negotiating tactic deployed in week nine when you have no alternative.

Get the answer in writing in the LOI if you can.

6. Walk me through your diligence list and who does the work.

You want scope, sequence, and a named individual per workstream. Then ask what they need from you and when, so the burden is predictable rather than an unending stream of requests during your busiest quarter.

Also ask when they intend to speak with customers and employees, and get agreement on how that is sequenced. Customer calls before you are ready to tell your customers is a real risk to your business.

7. What happens to my management team, my brand, and my location?

Ask for the operating plan in the first twelve months. Then listen for whether the answer is about growth or about cost.

Specific questions that produce specific answers: Are you merging us into an existing platform? Which functions would be consolidated? Is the location staying? Who would report to whom? Are there roles you would expect to change?

A buyer with no plan has not done the work. A buyer whose first three items are headcount has told you exactly what will happen, and there is nothing wrong with that if the price reflects it and you are honest with yourself about it.

8. What are you asking for in exclusivity, and what do I get for it?

Exclusivity should be as short as the diligence genuinely requires — commonly 60 to 90 days for a business this size. In exchange, ask for:

• Milestones. Confirmation of the equity syndicate by a stated date; lender term sheet by a stated date.
• A break-fee or expense reimbursement if the buyer walks for reasons other than a defined diligence finding.
• A right to terminate early if a milestone is missed, so a stalled deal releases you rather than running the clock down.
• Limits on the retrade — the price is fixed absent specified findings.

Most sellers accept the buyer's first draft of the exclusivity clause. It is negotiable, and the ask itself tells you something: a confident, prepared buyer will accept milestones because they expect to meet them.

9. Who signs the final agreement, and who else has to approve this?

Find out where the actual authority sits. An investment committee that has not seen the deal is a risk. A capital partner with a veto who has not been consulted is a bigger one.

Ask plainly: has everyone who needs to approve this transaction already reviewed it, and if not, when will they, and what could they say?

Three things to do alongside the questions

Get the tax structure resolved before signing. Asset versus stock sale and the allocation of purchase price can move your net proceeds substantially, and it is far harder to renegotiate after the LOI has set the framework.

Have your own quality-of-earnings work done first. Sell-side QoE costs money and repeatedly saves multiples of it, because you find the problems before the buyer's accountant does and you control the narrative around them.

Keep running the company. Performance dipping during diligence is the most common legitimate reason a price gets adjusted. The process will consume more of your attention than you expect. Delegate deliberately and make sure someone whose only job is the business is watching the business.

A short version to print

1. Where exactly is the equity coming from?
2. Who is the lender, and have they seen this deal?
3. Last three closings, and a seller I can call?
4. Close rate on signed LOIs?
5. What would change this price?
6. Diligence scope, sequence and owners?
7. Plan for my team, brand and location?
8. Exclusivity length, milestones and break-fee?
9. Who has final authority, and have they reviewed it?

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Stella Maris Capital is an independent sponsor in metro New York. We answer all nine of these unprompted, and our process and timelines are published rather than negotiated case by case. Call 973-397-5526.

General information only, not investment, legal, tax or accounting advice.