Advice on LOI Terms for $10M Rev. Construction Bus.
March 19, 2025
by a searcher from The University of Michigan - Stephen M. Ross School of Business in Detroit, MI, USA
Hey everyone,
I’m in the process of negotiating an LOI for the sale of a construction services business and would love to get insights from those experienced in the general contractor space. The business serves a mix of residential, commercial, and industrial customers, generating around $10M in revenue with ~$1M in SDE.
I want to make sure I’m structuring the LOI in a way that protects my interests (lawyer is engaged) while keeping the deal attractive for the buyer. Some key areas I’m looking for guidance on the LOI and in general are:
- Working Capital Adjustments: Any advice on what level of working capital requirements to keep in mind?
- Transition Period & Non-Compete: What’s reasonable in terms of transition support and non-compete duration/terms?
- Seller Commissions on Ongoing Deals: Has anyone structured agreements where the seller continues to earn a commission on projects secured post-sale?
- Transition Period & Non-Compete: What’s reasonable in terms of transition support and non-compete duration/terms?
- Red Flags to Watch For: Anything you’ve seen in past deals that I should be cautious about?
- Due Diligence Resources: Any recommendations for checklists, templates, or tools to kick off due diligence efficiently?
Would love to hear from anyone who has gone through a similar process or has experience structuring deals in this space. Appreciate any advice you can share!
Thanks in advance!
from University of Southern California in Los Angeles, CA, USA
1. Working Capital Adjustments The working capital peg should be based on an average of the last 12 months to reflect operational needs. Ensure you have a clear breakdown of accounts receivable, WIP, and retainage—construction businesses often have a long cash conversion cycle. Be cautious of any potential spikes in working capital pre-close, as sellers sometimes delay payables to make cash flow look better.
2. Transition Period & Non-Compete 5-year, 100-mile non-compete is reasonable, especially if the seller is retiring. If they aren’t, push for a longer restriction. Negotiate 6 months of full-time involvement, tapering into part-time consulting over the following 6-12 months.
3. Structuring the Seller Note to Reduce Your Risk A forgivable seller note can be a great way to protect yourself if revenue drops post-sale. You can structure it so that: If revenue declines significantly within the first###-###-#### months, a percentage of the seller note is forgiven. If the seller does not assist with business development as agreed, a portion of their note is reduced. This structure not only aligns the seller’s incentives but can also help reduce your SBA equity injection since SBA typically allows a seller note to count as part of your required capital contribution (if on a standby basis).
4. Red Flags to Watch For
Customer Concentration: If the top 3-5 customers make up more than 30-50% of revenue, that’s a risk.
Project Pipeline: Validate backlog and signed contracts vs. pending bids—pending work doesn’t mean secured work.
New Construction vs. Service Revenue Mix: Lenders prefer businesses with stable, recurring revenue. Heavy reliance on new construction can introduce risk, especially in economic downturns.
Licensing & Compliance: If you’re not licensed or don’t have direct GC experience, banks will view this as a major risk factor. You may need a key licensed employee or a strategic partner in place.
5.Due Diligence - Definitely get a QOE light done. Pay for experts to look into the deal vs. trying to do it yourself. This fee will pay you back many times over - 100% recommend doing this.
5. Financing Risk – Is This Deal SBA Financeable? SBA lenders will assess the following: Your Experience: If you lack direct GC experience, lenders may hesitate unless you can show operational or sales expertise.
Customer Concentration: If revenue is heavily dependent on a few clients, banks may require additional guarantees.
Revenue Mix: Lenders prefer businesses with a strong mix of service/maintenance and a good commercial/residential mix rather than just new residential construction.
I’d love to help you find the right SBA lender for this deal. We work with all the major SBA lenders. The bank pay us after your loan closes, so this is a 100% free service for you. Depending on the DSCR, I think this deal might qualify for good pricing. You can reach me here or directly at redacted You can also click here to schedule a meeting with me: https://cal.com/ishan-jetley-3d73m8/30min. Look forward to chatting!
from University of Alberta in Edmonton, AB, Canada
At $10mm of revenue, the company would be small for a GC and may not have much management depth beyond the owner. I expect the existing owner's technical expertise and personal relationships may be quite important so ensure that is considered during DD. You may need the owner for a longer period and/or align interests with key managers that are staying with the business. A longer non compete (5 years as suggested in another post) is important if the owner is younger and may re-enter the business.
Does the business take on jobs on a fixed cost basis or cost plus basis? Fixed cost contracts are much riskier.
Bonding can be challenging for a small GC if projects require bonding. The requirements of the bonding company should be considered when assessing WC and determining how much equity you have to invest. Also watch for personal guarantees provided by the owner for bonding that will need to be replaced.
Holdbacks can be challenging in the construction industry, sometimes taking months or even years to collect. Banks will often exclude holdbacks when assessing security for operating loans.
Customer deposits in excess of costs incurred on projects are often viewed as debt similar to a bank loan rather than a component of working capital.
Good luck with the pursuit!