In small business acquisitions, the cleanest processes follow a simple rule. Do just enough pre-LOI diligence to avoid bad fits and shape a smart offer. Do the post-LOI diligence to prove the numbers, lock down risks, and finalize structure. Mixing these up wastes time, tips your strategy, and can weaken your negotiating position.
This guide spells out what sellers typically provide before an LOI, what you should verify early, and what belongs in confirmatory diligence after you have exclusivity.
How sellers usually handle information
Before LOI, you can usually get
- High-level P&Ls and a basic balance sheet
- TTM revenue and SDE or EBITDA, with a short list of add-backs
- Revenue mix by product or service, and simple monthly trends
- Headcount and basic org overview
- Top customer concentration as percentages, not names
- High-level vendor or platform reliance
- Lease summary, remaining term, renewal options
- A brief description of systems and tech stack
- A call with the owner or broker to discuss history and reason for sale
Before LOI, sellers often will not provide
- Full bank statements and tax returns
- Customer and vendor names, contracts, or pricing
- Payroll registers or individual compensation details
- Legal documents, litigation history, or compliance files
- Detailed inventory listings or cost reports
- Access to staff, customers, or site tours without supervision
After LOI, with exclusivity, you can expect
- A populated data room
- Access to source documents for financial, legal, and operational diligence
- Management interviews, customer and landlord calls by consent
- On-site visits, system demos, and deeper operational reviews
Set expectations early so you do not overreach pre-LOI or under-ask post-LOI.
Pre-LOI goals and mindset
Your pre-LOI job is to answer three questions fast.
- Is this business truly in your strike zone.
- Can you frame a valuation range and a structure that fits risk.
- Are there obvious deal killers you should surface now, not later.
Think triage, not audit. You are building a clear thesis and a clean path to an LOI, not a full QoE.
Pre-LOI quick screen checklist
Use this in the first pass. If you cannot get a clear picture from these items, do not force it.
Business profile
- What it sells and to whom
- Geography and channels
- Reason for sale and target timing
Financial snapshot
- Three years plus TTM revenue and EBITDA or SDE
- Add-backs summary with short descriptions
- Monthly revenue and gross margin last 18–24 months
- High-level working capital notes, for example inventory cycles and AR terms
- Capex history and expected near-term needs
Concentration and dependency
- Top customer share as percentages by revenue
- Single-supplier or platform reliance
- Owner role in sales, operations, and approvals
People and process
- Headcount by function
- Presence of a second in command
- Use of SOPs, CRM, inventory or ERP, payroll, and accounting system
Legal and real estate
- Lease basics and any assignment rights
- Industry licenses and known compliance obligations
If the answers line up with your criteria, move to a targeted pre-LOI verify step.
Pre-LOI verify step: light tests that save you later
You do not need a full QoE before LOI. You do need a couple of quick proofs that the story makes sense.
Light financial tests
- One recent month bank deposits tie-out to sales summary
- AR and AP aging totals with current versus past-due bands
- A sample invoice set that matches the stated pricing and terms
- Simple inventory valuation method, for example FIFO at cost, with a recent count date
Add-back sanity check
- Identify recurring items labeled one-time
- Owner comp normalization that reflects real market cost
- Personal expenses that will not repeat after close
Concentration and continuity
- Confirm the top customer percentage is accurate
- Ask how many relationships are named to the owner personally
- Clarify which contracts require consent to assign
Working capital reality
- Payment terms with customers and vendors
- Seasonality or spikes that would change a peg
These checks take hours, not weeks. They prevent you from writing an LOI on a foundation that will not hold.
What to keep out of pre-LOI
- Demands for full tax returns or all bank statements
- Detailed payroll data or individual employee information
- Deep customer or vendor calls
- Extensive site visits that disrupt operations
- A full inventory audit or legal review
You need exclusivity for these. Save them for confirmatory diligence.
Crafting a better LOI
A strong LOI is clear, time-boxed, and aligned with how you plan to diligence.
Include
- Price and structure as a range if your diligence scope is wide
- Closing timeline and a realistic diligence period
- Exclusivity length and a mechanism to extend if seller deliverables are late
- A data request exhibit that lists the core items you will need in week one
- Contingencies around financing, diligence, and key third-party consents
- Working capital definition and initial peg approach
- A brief transition plan and seller involvement
Avoid
- Vague language like “subject to satisfactory diligence” without scope
- Open-ended timelines that kill momentum
- Promises to skip important diligence in a competitive process
Your LOI sets the tone. It should make it easy for the seller to say yes and for you to move fast once you have exclusivity.
Post-LOI confirmatory diligence: scope and sequence
Plan the first ten business days before you send the LOI. The best buyers walk in with a playbook.
Week 1 priorities
- Data room launch with financials, bank statements, tax returns, AR and AP agings, contracts, leases, licenses, insurance, corporate docs
- Kickoff call to align timeline, owners of each workstream, and weekly check-ins
- Confirm site visit dates, management interviews, and any third-party consents for calls
Financial diligence
- Quality of Earnings with revenue recognition testing, accrual adjustments, add-back validation
- Working capital study by month, including AR quality, AP practices, inventory turns, and deferred revenue if relevant
- Cash to accrual bridges if books are on cash basis
- Capex normalization and maintenance versus growth split
Commercial diligence
- Customer retention and cohort trends
- Pricing changes, discounting, and gross margin by product or customer
- Sales pipeline quality and channel performance
- Customer interviews with seller consent
Legal and regulatory
- Corporate formation, minutes, and ownership
- Material contracts with customers, vendors, and landlords
- Intellectual property, licenses, and compliance obligations
- Litigation, liens, and UCC searches
- Employment matters and benefits
Operations and systems
- Process maps and SOPs for order to cash and procure to pay
- Systems stack, data ownership, and key integrations
- Supplier stability and SLAs
- Physical assets, maintenance records, and safety practices
People
- Org chart with roles and tenure
- Compensation bands and incentive plans
- Key person risk and proposed retention approach
Sequence matters. Prove revenue and working capital early. You can negotiate everything else more effectively once the financial spine is verified.
Protecting leverage during confirmatory diligence
- Keep weekly status calls with a simple RAG status on each workstream
- Send short written updates to document progress and deliverables
- Flag issues early with a clear, data-based description and proposed remedy
- Use your LOI exhibit to remind the seller of agreed access and timelines
- If critical deliverables slip, request an exclusivity extension tied to the delay
Be firm, fair, and predictable. Sellers want certainty. Lenders want evidence. Your process should give both.
What to negotiate based on findings
Price changes
- Quantified reductions to normalized EBITDA
- Customer churn revealed in cohort analysis
- Higher ongoing capex or opex than represented
Structure adjustments
- Seller financing when continuity risk is high
- Earn-outs tied to revenue retention or margin targets
- Escrows for tax exposure, returns, chargebacks, or pending claims
Working capital
- Peg adjustments for seasonality and deferred revenue
- Clear definitions for inclusions and exclusions
- Specific reserves for doubtful accounts or slow-moving inventory
Reps, warranties, and covenants
- Specific reps for revenue recognition, inventory valuation, and the absence of undisclosed liabilities
- Post-close covenants for transition, non-compete, and non-solicit
Everything you ask for should tie to a specific, documented finding.
Common pitfalls to avoid
Pre-LOI
- Building a detailed model on unverified numbers
- Accepting aggressive add-backs without a quick sanity check
- Ignoring owner dependency or customer concentration until after LOI
- Chasing every interesting deal rather than screening hard
Post-LOI
- Letting timelines slip without consequence
- Pushing all issues to the purchase agreement instead of resolving facts now
- Over-rotating to price when structure can solve the risk
- Failing to prepare lender materials early, which compresses closing
Brokered vs proprietary processes
Brokered
- Expect tighter timelines, more buyers, and formatted data.
- Keep pre-LOI asks lean. Win on speed, clarity, and credibility.
- Use a crisp LOI with a short diligence period and a well-defined scope.
Proprietary
- Expect looser materials and more education.
- Spend a bit more time pre-LOI to confirm fit and build trust.
- Your LOI can include more guidance on process and deliverables.
Match your approach to the situation in front of you.
One-page reference: who does what, when
Pre-LOI: get to a smart yes or quick no
- P&Ls, TTM EBITDA or SDE, monthly revenue trend
- Add-backs summary, top customer percentages
- Owner role, headcount, lease basics
- Light tests. One month bank deposit tie-out. AR and AP totals.
- Define valuation range, structure themes, and a draft timeline
Post-LOI: prove it and paper it
- QoE, working capital study, cash to accrual bridges
- Contracts, licenses, leases, insurance, corporate docs
- Customer and landlord calls by consent
- Site visit, system demos, process walkthroughs
- Final price, structure, peg, and definitive docs
Final takeaways
- Use pre-LOI to qualify fit, frame value, and spot obvious risks. Keep it light and fast.
- Use post-LOI to verify the story with documents and tests. Move quickly and communicate often.
- Let findings drive structure. A slightly higher price with strong protections often beats a cheaper deal with loose terms.
- Protect your time and your leverage. A clear plan on day one shortens diligence and improves outcomes.
If you keep the right work in the right phase, you will commit with confidence and close with fewer surprises.
Contact us today or book a free consultation and learn how we can be a trusted partner on your next deal!
