“The deal is closed.”
This is the email every buyer hopes to send.
The deal is closed. Exclamation point.
You are the new owner, operator, or majority shareholder of the business you are pursuing.
For those actively searching or under LOI, this is the end goal.
But how do you get there?
What are the many emails, discussions, negotiations, and steps required to go from a signed LOI to the final business purchase?
Independent sponsors face several challenges when pursuing deals.
These challenges also apply to the self-funded search community.
Some of the most common include:
• Capital constraints
• Hyper deal sourcing and competition
• Competition across other independent sponsors
• Competition from larger self-funded searchers
Independent sponsors often pursue deals that exceed the SBA $5 million limit.
They will typically buy companies with a management team in place and sit at the hold co level.
They are not operating the business on a day-to-day basis.
However, early in the process they may get their hands dirty.
Independent sponsors also have mandates by investors to generate significant returns and develop an exit strategy.
This is often a:
Buy, hold, and sell strategy.
In contrast, a self-funded searcher may buy and hold indefinitely.
Additional challenges include:
• Fundraising for larger deals
• Investor relations
• Legal considerations
Once a letter of intent is signed, the clock begins.
A typical due diligence timeline is around 90 days.
During this period, the buyer must activate the right team and complete the steps required to close the deal.
This includes hiring and coordinating multiple service providers.
Examples include:
• CPA conducting a quality of earnings review
• Attorneys conducting legal diligence
• Advisors supporting structuring and negotiation
• Banking partners providing financing
The buyer sits in the role of quarterback of the deal.
You surround yourself with competent individuals to focus on the various aspects of due diligence.
This allows you to operate more like a general manager or COO during the process.
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Once the LOI is signed, financial diligence should begin immediately.
One of the first steps is kicking off the quality of earnings review (QoE).
This process substantiates the financials that were presented during the deal process.
Why is this necessary?
Because the financials presented in the SIM or marketing materials are largely unverified.
These materials are usually prepared by the business broker or seller representative.
Buyers typically have not yet examined the granular basis of the financials.
There could be:
• Issues in the accounting system
• Errors in financial reporting
• Manipulation that is not visible until you look under the hood
Starting the QoE early allows buyers to verify the financial data quickly.
It also helps determine whether the deal still makes sense.
The bulk of financial diligence typically happens in the first 30 days.
For example:
• Day 1: Signed LOI
• Day 3: QoE kickoff call
• Weeks 1-3: Financial analysis and document review
During this time, the diligence team analyzes the company’s financial data and reports findings to the buyer.
This early phase of diligence is critical.
It determines whether the deal should move forward.
After financial diligence begins, the next major step is bank underwriting.
In many small business acquisitions, this involves an SBA loan.
When a loan proposal is approved, the bank provides a term sheet.
This indicates the bank has reviewed the initial fundamentals of the deal.
However, this is only the beginning.
The formal underwriting process comes next.
During underwriting, the bank will ask dozens of questions, including:
• Questions about the buyer
• Questions about the company
• Tax returns and financial statements
The bank verifies the financials and ensures the business meets lending standards.
This stage often involves significant back-and-forth communication.
Underwriting can be time-consuming and frustrating.
But it is a necessary step toward securing financing.
You can find this and other content on my YouTube channel, including shorts, long-form videos, and guest discussions focused on buying small businesses and improving operations.
If you want to reach out on LinkedIn or X, share feedback, or suggest topics, feedback is a gift.
A quality of earnings review becomes extremely valuable during underwriting.
Much of the work completed during the QoE can be used to answer the bank’s questions.
For example, in one deal:
• The bank had concerns about the DSCR ratio
• There were questions around owner addbacks
The analysis completed during the QoE helped address these issues.
Working closely with the bank and the diligence team increases the probability of closing.
During underwriting, buyers may discover additional financial needs.
For example, a buyer may realize that the business requires more working capital than originally anticipated.
This could lead to negotiations such as:
• Requesting an additional line of credit
• Increasing the working capital included in the loan
These discussions often reopen review by the credit risk committee.
Additional negotiations may also include:
• Seller transition terms
• Purchase price adjustments
Once these negotiations are resolved and the purchase agreement is signed, the deal can move toward closing.
In the final stage of the process, the buyer moves toward transaction completion.
This includes:
• Signing the purchase agreement
• Completing final negotiations
• Introducing key management
• Finalizing closing documents
The purchase agreement is the legal binding document prepared by M&A attorneys.
It outlines the provisions of the transaction and formalizes the agreement.
Closing usually occurs near the end of the exclusivity period.
For example, one buyer successfully completed the transaction on day 89 of a 90-day diligence timeline.
A strong diligence team is essential.
A typical deal team includes:
• CPA conducting a quality of earnings review
• M&A attorney conducting legal diligence
• M&A advisor assisting with structuring and negotiation
• Industry experts providing operational insight
• Bank partner providing financing
However, one important point must be understood.
The bank is not truly part of your team.
The bank’s responsibility is to assess credit risk.
Their underwriting process is less intensive than a full quality of earnings review.
Just because the bank approves a loan does not mean the business is a good business.
Buyers must conduct their own diligence.
Another important component of the deal process is tax due diligence.
This includes reviewing:
• Federal taxes
• State taxes
• Local taxes
Tax diligence helps identify:
• Undisclosed liabilities
• Compliance issues
• Potential tax disputes
Failing to identify tax issues before closing could result in significant financial exposure for the buyer.
For example:
A buyer could inherit an unresolved IRS issue or undisclosed tax liability.
Every industry has unique diligence risks.
Examples include:
Key focus areas include:
• Ownership of intellectual property
• Scalability of the technology
• Cyber security risks
Key diligence questions include:
• Capital expenditure needs
• Investment in equipment and infrastructure
Buyers should ask:
Have capital expenditures been maintained or delayed?
Focus areas include:
• Distribution channels
• Inventory levels
• Inventory management
Buyers must assess whether inventory is usable and sellable.
Healthcare deals often involve:
• HIPAA compliance
• Regulatory risk
• Labor force considerations
• Insurance contracts or private pay relationships
Each industry requires a different diligence focus.
Beyond financial analysis, buyers must also conduct operational and legal diligence.
Operational diligence includes:
• Supply chain relationships
• Vendor dependencies
• Organizational structure
• Owner dependence
• Workflow inefficiencies
Legal diligence includes:
• Reviewing ongoing lawsuits
• Verifying ownership of assets
• Confirming contract rights
In some deals, assets may be owned by a separate entity.
Without proper diligence, a buyer could unknowingly purchase a company without owning the assets required to operate the business.
At a high level, the M&A lifecycle includes several phases:
The highest level of effort usually occurs during target screening.
Buyers may review hundreds of companies before selecting a target.
Once a deal is under contract, the diligence team performs most of the analysis.
This allows the buyer to focus on financing and closing the transaction.
Buying a business requires a strong team.
Surround yourself with individuals who have expertise in the space.
Working with competent professionals reduces risk and increases the probability of closing.
Trying to handle everything alone often leads to missed deal findings.
Those missed findings can cost far more than the cost of professional diligence.
Build the right team.
Follow the process.
And move step by step from signed LOI to the email every buyer wants to send:
“The deal is closed.”
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