Industry
Part of Buyer search: from criteria to letter of intent
The buyer search checklist: five gates before you spend a cent on diligence
Buyer search checklist with five gates: what to settle before enquiring, before signing confidentiality, before a letter of intent, and before paying for diligence.
A search checklist has one job: stop you from spending money on the wrong business at each point money is about to go out.
The five lists below run from before you look to the day you commit to diligence, and each ends with a gate. If you cannot check every item, do not go forward; go back.
What to take away
- The expensive stages are the late ones, so the cheap checks come first and are done for every listing without exception.
- Your advisers go on the list before the first enquiry, not after the first offer.
- Keep a log. A search you cannot review is a search you cannot fix.
Before the first enquiry
- A one-page criteria documentsector, size range, location, the owner involvement you will accept, and the things that would make you decline regardless of price.
- A funding statementwhat you can put in, what you expect to borrow, and against what. Read how acquisitions are financed before you write the borrowing line, because a lender tests the business, not your optimism.
- A short written profile of yourself as a buyer that an intermediary can forward to a seller: background, funds, timescale, why you are buying.
- Named advisers, engaged or at least identified: an accountant who has examined a business for purchase before, a lawyer who has closed a business sale, and a decision on whether you want a buy-side adviser as well. Buying a whole business is a transaction of the size that needs all three.
- A search loga file in which every business you look at gets a line.
- A time budgethours per week, and a date on which you will judge whether the search is working.
Gate: without the criteria document, every listing will look interesting, and you will discover that only after you have signed several confidentiality agreements.
Pre-Search Buyer Checklist
- One-page criteria document
- Funding statement
- Buyer profile for intermediaries
- Named advisersaccountant, lawyer, buy-side
- Search log file
- Time budget and review date
Before signing a confidentiality agreement
Run this on every listing, however good it looks.
Sign the Confidentiality Agreement?
Can you say in one sentence why this business?
Sign and log the listing
Do not sign; keep searching
- Which of your written criteria does it meet, and which does it fail?
- Is the asking price inside a range your funding could reach on the stated earnings, before any verification?
- Is a reason for sale stated, and is it plausible for a business of this kind?
- How long has it been listed, and has it changed hands between intermediaries?
- Read the confidentiality agreement itselfits term, what counts as confidential, whether it bars you from approaching staff and customers, whether it binds your advisers, and whether it contains a non-circumvention clause tying you to the intermediary for any future dealing with this seller.
- Log the listing, the date, and the decision.
Gate: if you cannot say in one sentence why this business rather than a comparable one, do not sign. Signing costs nothing today and something later, because every agreement you hold narrows whom you can talk to.
After the information package
- The earnings figure states its basisowner's discretionary earnings or an operating measure. They are different numbers answering different questions, which the valuation methods guide sets out.
- Every adjustment to earnings is listed and described, not merely totalled.
- Revenue by customer is provided, or a date is given for providing it.
- A plain description of what the owner does in a normal week.
- Lease term, rent review dates, and the assignment provisions.
- What is included and excludedproperty, vehicles, stock, receivables, cash, the trading name.
- Staffnumbers, tenure, who matters, and who is on a written contract.
- Your questions sent in writing, with the answers logged against them.
- Your accountant has seen the package and told you which figures they would test first.
Gate: the package must support a price you would actually pay. If reaching that price requires you to assume things the package does not say, you are valuing your own hopes.
Before a letter of intent
- Price, and the earnings basis it rests on, in writing.
- Structureasset or share purchase, what is deferred, whether any part is an earn-out, whether the seller finances any of it. The options and their consequences are on the deal structures page.
- What stays with the seller.
- A stated working capital expectation at closing.
- The transition periodhow long the seller stays, doing what, paid how.
- Exclusivityhow long, and what happens when it expires.
- Diligence scope, timetable, and who pays for what.
- Conditionsfinancing, lease assignment, license transfer, third-party consents.
- Which clauses bind and which do not. Usually only confidentiality and exclusivity bind; the rest is a statement of intent, which is what a term sheet is for.
- Your lawyer has read it. Your accountant agrees with the earnings basis.
Gate: anything the seller will not put in the letter, you should expect not to get later. The letter is the high-water mark of your negotiating position, because after it you are the one spending money.
Letter of Intent Contents
- Price and earnings basis
- Structureasset, share, earn-out
- What stays with seller
- Working capital expectation
- Transition period terms
- Exclusivity length and expiry
- Diligence scope and cost
- Conditionsfinancing, lease, consents
Before spending on diligence
- Indicative terms from a lender in hand, if you are borrowing.
- A written diligence scope that starts with the findings that would make you walk away.
- A data room, or an agreed equivalent, so documents arrive in one place with a record of what was requested and when.
- Adviser budgets agreed in writing, with what is fixed and what is hourly.
- Your own plan for the first three months of ownership, so the questions your team asks are the ones that matter to you and not merely the ones on a standard list. The diligence guide explains why scope decides cost.
Gate: do not spend diligence money on a deal whose financing you have not tested. A finding that kills the loan kills the deal, however clean the rest of it is.
Keeping the log
For each business: date, source, which criteria it passed and failed, the stage it reached, and why it stopped. Review the log monthly. If everything fails at the same stage, the problem is your criteria or your funding, not the market. If nothing reaches the package stage at all, the search itself needs redesigning, not more hours.
