End of the Deal: How to Avoid Common Post-LOI Pitfalls

Investment bankers and M&A advisors tend to emphasise the steps leading up to an LOI: boosting value, identifying the right partner, preparing financials, and structuring deals. The post-LOI phase, during which parties manage due diligence, negotiate working capital, cash and debt definitions, and navigate the various components of closing the transactions and true-up process, often remains overlooked.

Yet, this phase requires as much rigor as the first part of the process: After all, nearly 50% of deals fail to close even after an LOI is in place. 

Some of the most common reasons deals don’t close after an LOI is signed include:

• Cultural and strategic misalignment: The buyer and seller may realise they are not the right fit after further scrutiny.
• Funding issues: Buyers could lack the necessary funds to close the deal if seller does not sufficiently diligence the buyer.
• Missed projections: Sellers might fail to meet projected financial targets.
• Client losses: The seller could lose a key client during the negotiation process.
• Uncovered risks: Due diligence may reveal risks that were previously unknown.
• Messy financials: Disorganised financial records can derail the process.
• Economic downturns: Market conditions can change, making the deal less attractive.
• Health changes: The death or serious illness of a key player can halt negotiations.
• Legal deal killers: Unforeseen legal issues can emerge.
• Deal fatigue: Prolonged negotiations can lead to frustration and a breakdown in talks.

With so many potential pitfalls during the post-LOI phase, it’s up to both parties to take this period seriously and invest the time and attention needed to cross the finish line arm in arm. 

Consider the pre-LOI phase is akin to dating. Both parties are on their best behaviour, assessing compatibility, and ensuring the potential partnership aligns with their strategic goals. This stage is critical, particularly in industries such as marketing where culture plays a significant role.

During this phase, both parties can set themselves up for later-stage success by remaining aligned on timing and using an intermediary to keep arm’s distance when it comes to negotiating valuation, any structuring needs to ensure tax efficiencies, and other shareholder priorities are met. 

Although negotiating these variables is no small task, it’s once the LOI is signed that the real work begins, and the stakes grow significantly higher. Everyone is more committed, given the investment in legal fees, due diligence and time.

Doing due diligence

Now that the proposal has been accepted and the wedding date has been set, so to speak, much of the work is still needed from the seller, who will have an extensive list of due diligence items to gather and questions to answer. Even with the assistance of advisors, this phase demands significant effort from the seller’s internal team, particularly the CFO, HR, and operations leaders. 

Due diligence means delivering and aligning under pressure from: 

• Financial scrutiny: In-depth analysis of profit and loss statements, balance sheets, cash flows, and projections.
• Legal examination: Reviewing business formation documents, client and vendor contracts, operating agreements, shareholder changes, and potential legal disputes.
• Operational insights: Detailed information about clients, business development processes, marketing strategies, employee positions, salaries, and benefits.

Simultaneously, legal negotiations and integration discussions are underway. Advisors continue to push on business terms while lawyers work to mitigate risk, often resulting in significant impacts on the seller’s take-home funds. Clean financials and efficient reporting help advisors leverage the information to negotiate working capital, debt definitions, employment contracts, and benefits integrations, which are all critical to the deal’s success.

Closing and integration

Ideally, the legal documents are negotiated and finalized a few days to a week before closing, but this is rarely the case. As negotiations continue, activities such as benefit integration, closing balance sheet projections, and press releases are in full swing.

The phrase 'time kills all deals' rings particularly true during this phase. While rushing the process can lead to lost leverage, taking too long can result in deal fatigue and frustration.

Your best bet? Lean on an advisor to manage and coordinate the diligence process, controlling the flow of information, and addressing issues as they arise. Evalla Advisors does initial diligence when engaged during the first three months of their process to look for any risks and mitigate those risks before any buyer gets into diligence. 

By involving an advisor early in the process, sellers can better offload some of the tedium of the diligence process and any follow-ups. Having an advisor engaged early to do pre-diligence and then also involved during buyer diligence allows the advisor to better understand the balance sheet and other financials more extensively, advise and support on the creation of the projected balance sheet that leads to projected cash and debt accounted for at close. After closing, the advisor can also advise on the true-up amounts to ensure negotiated terms are followed.

Securities offered through Finalis Securities LLC Member FINRA/SIPC. Evalla Advisors LLC and Finalis Securities LLC are separate, unaffiliated entities.