To LOI or not to LOI, that's the question.

searcher profile

November 18, 2023

by a searcher from Canisius College in Greensboro, NC, USA

Hello Searchers and partners.

I received a CIM on a company that I find interesting. The summary and background were informative, but the financial information was lacking. I have asked the broker for a full TTM income statement and a breakdown of the SDE add backs and have not heard back. My thought process is that if I can't get the deal to cash flow then what is the point of an LOI. But I am wondering if perhaps I should have submitted an LOI to get the additional information.

Thoughts or feedback would be greatly appreciated.

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commentor profile
Reply by an intermediary
from The University of Chicago in Chicago, IL, USA
If you like the business, consider limited information as a benefit to you.
In my 35 years as M&A Intermediary, I have never provided TTM analysis pre-LOI. Frankly it is to buyer's disadvantage. Yes, I am saying it correctly. What is important is YTD and YTD-last year.
Small businesses do not have TTM, nor it is easy to do TTM with add-backs and YE accounting policies that differ from monthly policies. So, if you ask something that is normally non-existent or requires significant analysis and may even require seller to engage his CPA, the broker has a reason to not respond. For current year, all you need to know at early stage is how is the business doing relative to last same time period last year. Hopefully you can get YTD financials, not just top line.
Your offer can be IOI or LOI-light and is subject to information provided anyway. It is the seller and broker who are at risk of screening buyer based on limited information.
I can go on, but the key point is, if you like the business, leverage limited information to build chemistry with the seller and the broker.
In all of my transactions, seller selects the buyer that he/she likes. the buyer who is people-orients, who understand business always has ups/down, can preserve legacy, has minimum risk of closing, etc. The buyer who focuses too much on numbers, especially too early in the game, is generally out.
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Reply by an intermediary
from The University of Chicago in United States
A few thoughts: 1) Push for the financials again - be polite but firm that it's a dealbreaker without it. 2) If still no luck, consider a conditional LOI - make it expire in 3 days to light a fire, but state you need the income statement & SDE details to formally evaluate. 3) Leave yourself an out - say the LOI is non-binding and you may pull out at any time before signing purchase papers. Ultimately the business needs to cash flow, so don't move forward till you have confidence in the numbers. But a conditional LOI could be a middle ground to persuade them to share while still protecting your interests. With the right conditions, it shouldn't tie your hands if red flags appear in the detailed financials. Let me know if any other questions come up!
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