What to Do Before vs. After the LOI When Buying a Business

Phase 1 — Pre-LOI: cheap exploration

Pre-LOI work should be mostly free and entirely reversible. The trap most first-time buyers fall into is doing post-LOI work pre-LOI (premature spending) or pre-LOI work post-LOI (catching deal-breakers when the exclusivity clock is already running).

1. Lock down your buy box.Industry, revenue range, EBITDA/SDE range, geography, owner-operator vs. semi-passive, capital you can deploy, price you’d actually pay. Specific numbers, written down. Without this, every listing feels either interesting or wrong and you burn weeks.
2. Pre-qualify with 2–3 SBA preferred lenders before you have a specific deal. They’ll tell you what you can borrow against what kinds of businesses at what terms — and this shapes your buy box. Having a preferred lender on the line means when you find a real deal you can produce a financing pre-qual letter inside a week.
3. Build your team in advance.M&A attorney (interview 2–3), a QoE firm contact, and an insurance broker. You don’t engage them yet — you just know who you’d call.
4. Quick-screen listings.Pull the SDE or EBITDA from the CIM. Check the asking price multiple against industry comps. Run rough financing math: with X down + Y SBA + Z seller note, what’s monthly debt service vs. SDE? Is there enough left for you to live on? “Worth a conversation” or “skip.”
5. Sign NDAs and read full CIMs for the screened-in deals.
6. Have 1–3 conversations with promising sellers. The most useful answers come from the soft questions: why are you really selling, what would change if you left, who’s the team, what does your day look like.
7. Get tax returns and bank statements.This is the highest-leverage pre-LOI work. The CIM’s SDE is heavily adjusted; the tax returns are reality. Reconcile the two yourself. If the gap is hand-waveable, fine. If it’s not, walk.
8. Model the actual deal. Total capital required (price + working capital + closing costs + ~$25K DD reserve + ~$25K transition reserve + cash buffer), financing structure, monthly debt service, DSCR (SBA wants 1.25x+), cash-on-cash after debt service, owner comp. Does it work?
9. Pre-validate structure decisions.Asset vs. stock, Form 8594 allocation strategy, buyer entity and election timing, working capital benchmark, earnout treatment if applicable. This is your home court if you’re a CPA — but make sure you’ve thought it through before you put pen to LOI, because asking for changes after is asking from a worse position.
10. Be willing to walk.Most deals don’t pencil. Pre-LOI is when walking is free. The big deal-breakers usually surface in conversation or in the tax return reconciliation.

Use the pre-LOI readiness checklist to confirm you’ve covered each item before moving to the LOI.

Pre-LOI is when walking is free. The big deal-breakers usually surface in conversation or in the tax return reconciliation — before you’ve spent a dollar on formal due diligence.

Phase 2 — The LOI gate

The LOI is not a formality. It is the moment you stop exploring and start committing. Sign when — and only when — all five conditions are true.

If any one of those isn’t true, keep talking or move on. The LOI triggers an exclusivity clock that benefits the seller as much as the buyer — and the due diligence spend that follows is real money with no guarantee of a deal.

Phase 3 — Post-LOI: the meter starts running

The moment you sign, the exclusivity clock starts (typically 30–90 days). The seller agrees not to talk to other buyers; in exchange you commit to doing the work in good faith. Seven tracks run in parallel from this point.

1. Financial due diligence.QoE report if commissioning ($15K–$50K, 4–6 weeks), or your own deep CPA review of financials, bank statements, and add-back substantiation.
2. Legal due diligence.Your M&A attorney reviews contracts, leases, IP, litigation history, and employment agreements. You don’t need to be in the line-by-line; you need to read the summary memo and flag anything material.
3. Tax due diligence. Payroll compliance, sales tax exposure (multi-state nexus is the silent killer), audit history, unclaimed property liability.
4. Operational due diligence. Customer concentration verification (talk to top customers if the seller allows), key employee retention plan, vendor agreements, and technology stack assessment.
5. Real estate and lease review. Landlord consent process kicks off. Phase 1 environmental if real property is involved.
6. Lender formal underwriting.Personal financial statements, tax returns, and business projections submitted to the lender. SBA process runs 60–90 days. The commitment letter is the milestone that unlocks the closing timeline.
7. Definitive purchase agreement and buyer entity setup. Your attorney drafts off the LOI terms. You read every line of reps and warranties, indemnification, working capital definition, and disclosure schedules. In parallel: form the new buyer entity, set up banking, payroll, insurance, software, and vendor accounts for the new entity before close.

Post-close, the working capital true-up (60–90 days after closing) and seller transition period are the last mechanics before you’re fully operating the business on your own.