🏴☠️ ⚡️ What Happens After LOI? A Buyer / Seller Guide (Acquisition Concepts)
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TABLE OF CONTENTS:
POST-LOI PROCESS OVERVIEW: KEY STEPS, RESPONSIBILITIES & ADVISORS
TECH DUE DILIGENCE
QUALITY OF EARNINGS (QofE)
ASSET PURCHASE AGREEMENT
CLOSING
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A signed Letter of Intent (LOI) in an acquisition is like putting an offer down on a new home. It’s an exciting milestone—both buyer and seller have agreed on valuation and payment terms, and everyone feels optimistic about moving forward. But, just as with buying a home, post-LOI due diligence is when the real inspection happens. Now it’s time to pull back the curtain, look beyond the staged rooms, and ensure there are no hidden structural issues that could turn this dream into a nightmare.
In the same way that a home inspection checks for leaky pipes, hidden mold, or faulty wiring, post-LOI due diligence involves digging into potential deal-breakers (and yellow flags uncovered during prelim DD) that could kill the deal or impact value. Buyers are looking for issues like unwieldy tech debt or dodgy accounting—equivalent to uncovering a cracked foundation or termite damage in a house.
Moreover, this stage is about validating assumptions that are foundational to the still-forming growth and transformation plans post-close. Think of it like mapping out which walls can be knocked down for that open floor plan. A savvy buyer proceeds step-by-step, prioritizing inspections to focus time and resources on high-impact areas first. By addressing each diligence bucket in order, buyers make sure they're only moving forward when each critical part of the business "passes go."
Below, we break down each phase of post-LOI diligence, outlining the key steps, roles, and advisors that help both buyers and sellers navigate this essential and final inspection phase before closing.
POST-LOI PROCESS OVERVIEW: KEY STEPS, RESPONSIBILITIES & ADVISORS
A streamlined guide to essential steps in the acquisition process, with activities and typical advisors involved for both buyers and sellers.
1. Tech Due Diligence (1 Week)
Buyer Activities: Conduct a thorough audit of the seller's code base, resulting in a Tech Due Diligence scorecard.
Buyer’s Advisors: Technical Advisors – Internal software engineers or technology consultants conduct the audit and evaluate the code base quality.
Seller’s Role: Provide access to code repositories and answer questions as needed.
Seller’s Advisors: Not typically required, though Internal Tech Leads may support by addressing specific questions.
2. Quality of Earnings (QofE) Analysis (2-4 Weeks)
Buyer Activities:
Revenue Analysis: Assess recurring vs. non-recurring revenue, validate revenue recognition, and evaluate customer concentration risks.
Earnings Adjustments: Identify non-operational or one-time items and calculate adjusted EBITDA or Seller’s Discretionary Earnings (SDE).
Cost Structure & Margins: Analyze gross margins and operating costs.
Working Capital: Set a working capital peg for post-acquisition liquidity.
Cash Proof & Reconciliation: Reconcile bank statements and cash flows.
Client Metrics (SaaS-Specific): Review MRR/ARR, churn, LTV, and CAC.
Balance Sheet Review: Verify key assets and liabilities.
Risk & Red Flags: Highlight risks, inconsistencies, and red flags.
Buyer’s Advisors: Certified Public Accountant (CPA) – Conducts financial analysis, reconciles cash flows, and reviews client metrics.
Seller’s Role:
Documentation: Provide financial records (statements, tax returns, accounting records), sales, expense, and legal documentation.
Seller’s Advisors: CPA – Can assist with documentation preparation, reducing internal effort.
Tip: Looping in a CPA at this stage can streamline the documentation process.
3. Asset Purchase Agreement (APA) (4-6 Weeks)
Buyer Activities:
APA Drafting: Outline purchase price, asset transfer, assumed liabilities, and closing conditions.
Key Clauses:
Purchase Price: Structure payment (cash, promissory note, etc.).
Assets Transferred: Define code base, customer/vendor contracts, etc.
Liabilities Assumed: Specify any buyer-assumed liabilities.
Representations & Warranties: Assure asset condition and disclose risks.
Indemnifications: Protect the buyer from future claims related to pre-closing activities.
Buyer’s Advisors: Legal Team – Drafts the APA, negotiates terms, and ensures legal soundness.
Seller’s Role:
APA Review: Assess and negotiate terms, provide necessary disclosures, and negotiate indemnification provisions.
Warranties & Disclosures: Outline asset-related assurances.
Seller’s Advisors: Legal Team – Reviews terms, negotiates on behalf of the seller and provides warranties and disclosures as required.
4. Closing (1 Week)
Buyer Activities:
Final Steps: Complete financing and fulfill all closing conditions (e.g., regulatory approvals).
APA Execution: Sign the APA and complete the transfer of funds.
Asset Transfer: Coordinate transfer of all physical and intellectual property.
Buyer’s Advisors: Legal and Financial Advisors – Finalize documentation, facilitate fund transfer, and ensure completion of asset transfers.
Seller’s Role:
Transfer Ownership: Sign the APA and transfer all agreed-upon assets.
Asset & Contract Transition: Complete handover of customer contracts, etc.
Transition Services: Offer any required post-closing support.
Seller’s Advisors: Legal Team – Confirms all legal obligations are met and assists with asset transfer.
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