Deal stages · Before you buy
What to verify before signing an LOI to buy a business
Published · Reviewed by The Diligence Standard Team · Updated
An LOI normally precedes full diligence, but the buyer should test enough to know what the offer assumes. Clarify earnings, price basis, working capital, financing, structure and major dependencies before exclusivity.
A realistic transaction story
Priya offered six times reported earnings for a software-services firm. After signing, she learned that the largest customer was ending a project and that the seller performed unpaid technical work. Both issues could have been surfaced with a short pre-LOI evidence request.
What the evidence changed
The LOI was based on two material assumptions that had not been clearly stated or tested.
What to check
- Write down the exact claim and who supplied it.
- Ask what was independently tested, by whom and under what scope.
- Attach a concise assumptions schedule covering earnings, customers, owner role, working capital, assets and financing.
- Translate any unresolved gap into cash, price, terms, timing or a decision not to proceed.