What Happens Between the Letter of Intent and Closing

Most owners think the hard part is over when they sign a letter of intent. In my experience it is closer to halfway. The letter sets the price and the main terms. The months after it decide whether the deal closes at that price, at a lower one, or not at all.

Here is what that stretch usually looks like, and what an owner can do to keep it on track.

The letter of intent is mostly not binding

A letter of intent, or LOI, lays out the price, the structure and the main terms. Most of it is not binding. The parts that usually are binding are confidentiality and exclusivity, the promise that you will stop talking to other buyers for a set period.

That exclusivity matters. Once you sign, your leverage drops, because the other buyers are gone. Before you sign, make sure the terms you care about most are written into the letter, not left for later. I covered the terms worth reading closely in Cash at Closing, Earnouts and Seller Notes.

Diligence: the buyer checks everything

Diligence is the buyer confirming that the business is what you said it was. Expect requests for:

• Three or more years of financial statements and tax returns
• Customer and supplier contracts
• Payroll, benefits and key employee agreements
• Leases, licenses and permits
• Any legal claims, past or pending

Most of this is ordinary. What causes trouble is anything that does not match what the buyer was told earlier. A customer contract that ends sooner than expected, a tax issue nobody mentioned, numbers that do not tie to the returns. Each surprise is a reason to renegotiate.

The best defense is to gather these documents before you ever sign a letter. I wrote about what a buyer reads first in What a Buyer Actually Looks At in Your Financials.

The purchase agreement

While diligence runs, the lawyers draft the purchase agreement. This is the binding contract, and it is far longer than the letter. Beyond price and payment terms, it covers what you promise about the business (representations and warranties), what happens if one of those promises turns out to be wrong, how much of the price is held back to cover it, and what you agree not to do after the sale.

This is where a good deal lawyer earns their fee. An owner who has never sold a company should not try to read this alone.

Financing, consents and the last weeks

Several things often have to happen before closing. The buyer's lender finishes its own review. Landlords, key customers or licensing agencies may need to approve the change in ownership. Employees may need to be told, at a time both sides agree on.

Any one of these can move the closing date. A few months from letter to closing is common for a small company, and it can take longer.

How to keep a deal on track

• Be honest early. Tell the buyer about known problems before they find them. A problem you disclose is a negotiation. A problem they discover is a trust issue.
• Keep running the business. Owners who get distracted by the sale often see results slip during diligence, which is the worst possible time.
• Answer requests quickly. Long gaps make buyers nervous and give them time to reconsider.
• Know your walk-away points. Decide before diligence starts which changes to the price or terms you would accept, and which you would not.

How we approach it at Creek Equity

At Creek Equity we invest our own capital, not a fund's, so we have no deadline to sell what we buy. We try to raise our questions early, and when we make an offer we walk the owner through how we got to it. An owner who knows what to expect between the letter and closing is far more likely to get to the finish line on the terms they agreed to.

If you are weighing a letter of intent, or expect one, and want to talk it through, write to me at scott@creekequity.com. The first conversation is with me directly.

This article is general information, not legal or tax advice.

Also published on Substack and LinkedIn.