The Letter of Intent (LOI) Feels Like the Finish Line – But It’s Usually Just the Beginning
Over the years, we have seen many business owners attempt to navigate the sale process without the benefit of an experienced M&A advisor. While finding an interested buyer may be viewed on the surface as the most difficult part of a transaction, many of the greatest risks emerge after a Letter of Intent (LOI) has been signed, when buyers begin validating assumptions and conducting detailed diligence. Many business owners view a signed LOI as confirmation that the deal is essentially done. In reality, the period between receiving a LOI and closing is often where most of the heavy lifting takes place and having a seasoned M&A advisor provides the most value.
It’s not uncommon for transactions that appear certain to close to experience valuation reductions, significant restructuring, or fail altogether during this stage, especially when business owners attempt to run the process without an advisor. In this article, we look at some of the most common post-LOI challenges business owners face and how having an advisor helps sellers anticipate these risks, manage the diligence process, and maintain momentum from LOI through closing.
Buyer Discovers Financial Performance Isn’t What They Expected
In speaking with business owners who have experienced a failed transaction, one of the most common reasons transactions lose momentum after signing an LOI is that the buyer’s detailed review of the business reveals a different financial picture than what was initially understood. A few examples of this in the due diligence process include unsupported add-backs, revenue recognition inconsistencies, one-time expenses that are not truly one-time, and working capital assumptions that differ from historical operating performance, among others. During the financial due diligence process, buyers closely examine EBITDA adjustments, revenue trends, margins, and recurring expenses to determine the true cash-generating ability of the business. Even relatively small discrepancies can erode buyer confidence and lead to valuation adjustments, revised deal terms, or, in some cases, termination of the transaction altogether.
In our experience, these issues are best addressed long before a buyer begins diligence. An experienced advisor helps sellers evaluate financial readiness, identify potential diligence concerns, coordinate Quality of Earnings work, and ensure the company’s earnings story can withstand scrutiny. When buyers encounter fewer surprises, transactions tend to move more efficiently toward closing. It may also be beneficial for business owners to consider obtaining a sell-side Quality of Earnings report before going to market.
Framing Customer Concentration
Customer concentration is often identified well before a Letter of Intent is signed, but it frequently receives additional scrutiny during diligence as buyers evaluate the sustainability of future cash flows. While concentration by itself does not necessarily derail a transaction, it can influence valuation, earnout structures, indemnification provisions, and other deal terms. An experienced advisor helps sellers anticipate these conversations, present customer relationships in the proper context, and provide buyers with the information necessary to evaluate the risk accurately. In many cases, effective communication and preparation can be just as important as the concentration itself.
Key Employee Risks Surface
Buyers are not just acquiring products, services, or physical assets, they are also investing in the people responsible for generating future growth and maintaining customer relationships. During due diligence, buyers often assess the depth and quality of the management team and evaluate whether critical functions are concentrated in a few individuals. If key customer relationships, operational expertise, or institutional knowledge reside with a small group of employees who may not remain after the transaction, buyers may view the business as carrying greater risk. This can result in increased scrutiny, requests for retention plans, and/or adjustments to valuation and deal structure.
Buyers want confidence that the business can continue to perform following a transition in ownership. Advisors often work with management teams well before going to market to identify key-person dependencies, develop succession plans, and demonstrate organizational depth. A business that is not overly dependent on a handful of individuals is generally perceived as lower risk and commands broader buyer interest.
Legal and Contractual Issues Appear Late
Legal and contractual issues often remain hidden until the due diligence phase when buyers and their advisors begin conducting a detailed review of the company’s records, agreements, and compliance history. What may seem like minor administrative matters can become costly when buyers discover missing corporate records, contracts that cannot be transferred to a new owner, unresolved disputes, or unclear ownership of intellectual property, to name a few. These issues can introduce uncertainty, delay the closing process, increase transaction costs, and, in some cases, jeopardize the deal entirely.
One of the often-overlooked benefits of a well-managed sale process is identifying these issues before a buyer discovers them. Advisors routinely work alongside legal counsel and management teams to organize corporate records, review material contracts, and uncover potential issues early, allowing sellers to address them proactively rather than reactively.
Working Capital Becomes a Negotiation Tool
Many business owners focus almost exclusively on purchase price when negotiating a sale, only to discover later that working capital may have just as much impact on the proceeds they ultimately receive at closing. After a LOI is signed, buyers typically conduct a detailed analysis of the company’s historical working capital needs to determine appropriate levels required to operate the business going forward. We often see buyers and sellers having different expectations regarding inventory levels, the collectability of receivables, seasonal fluctuations, or the amount of cash that should remain in the business at closing. These disputes can lead to last-minute negotiations, delays, and even reductions in the seller’s net proceeds if not addressed early in the process.
Working capital is one of the most common sources of post-LOI friction because many sellers underestimate its impact on transaction proceeds. Having an experienced advisor help establish supportable working capital targets, analyze historical trends, and frame discussions with buyers early in the process reduces the likelihood of contentious negotiations as closing approaches.
Buyer and Seller Expectations Become Misaligned
As due diligence progresses and definitive agreements are negotiated, more often than not we see differing expectations between buyers and sellers regarding post-closing involvement, earnouts, employee retention, growth initiatives, governance responsibilities, or compensation structures. These discussions often receive less attention early in a transaction because both parties remain focused on valuation.
The transactions that move most efficiently toward closing are typically those where both parties have invested the time upfront to understand not only the economics of the deal, but also what success looks like after the transaction is complete. An experienced advisor understands that alignment on post-closing expectations is critical. By facilitating these conversations early, we help reduce misunderstandings and prevent avoidable conflicts later in the process.
Why Choosing the Right Advisor Matters
These challenges business owners face after signing an LOI are not exhaustive, but they are among the more common sources of post-LOI friction. Left unaddressed, these issues can slow momentum, create uncertainty, and ultimately contribute to the deal fatigue that causes many otherwise attractive transactions to stall or fail before reaching closing. Further, continuing to run your business while managing a transaction is challenging, which is why many owners underestimate the value of having an advisor managing the process.
This is why M&A advisors focus on far more than simply identifying prospective buyers. Much of the value an investment banker provides occurs after an LOI has been executed, when diligence begins, negotiations become more complex, and buyers shift their attention from opportunity to risk. We help anticipate potential issues, coordinate diligence efforts, facilitate communication between parties, and maintain momentum throughout the process. In many cases, the difference between a successful closing and a broken deal is not the absence of challenges, but how effectively those challenges are identified, managed, and resolved
Porter White’s M&A helps business owners navigate the complexities of the transaction process by providing structure, market knowledge, and disciplined execution to the process to facilitate value-maximizing transactions that align with their long-term objectives. Whether you are actively considering a sale or simply beginning to explore your options, understanding potential deal risks before going to market can significantly improve both transaction efficiency and value. If you are interested in selling your business, acquiring a business, or learning more about what your business is worth, please contact Michael Stone, Zac Venos or visit us online to learn more.
