Questions to Ask a Private Equity Firm Before an LOI

Why ask questions before you sign a letter of intent?

The letter of intent is where price, structure and timing first become concrete. Many LOIs also include an exclusive period, so ask your lawyer how much room you keep to talk to other buyers once you sign. Ask your hard questions first.

First Citizens, a bank with a wealth practice, says to evaluate a buyer “just as rigorously as they evaluate you.” The buyer will review your books, contracts and customers. You should review the buyer with the same care. Our letter of intent guide covers the document itself.

What should the structure of the offer look like?

Ask how much of the price is cash at closing, how much is rolled equity and how much depends on future results. The headline price means little until you see those three parts.

Altair Advisers, a wealth advisory firm, says private equity deals “usually include a third component: earnout payments” on top of cash and rollover equity. Ask for each piece in dollars. Then ask how each piece is paid and what could reduce it. Our posts on rollover equity and how long an earnout lasts explain the terms.

Which five questions matter most?

Five questions cover most of the risk: fit, structure, your role, debt and the firm’s record. The table below shows what to ask on each topic and what a clear, useful answer sounds like.

First Citizens advises you to “start by asking about their strategic fit and why they’re interested in your company.” It also says to ask “how much debt they plan to place on your business to fund the transaction.”

What should you ask about your role and your team?

Ask what you will do after closing, who you will report to and what happens to your key people. Get clear answers now, because vague promises before the LOI often become hard conversations after closing.

First Citizens tells owners to “insist on clarity regarding your role after the sale” and to ask how the new owners plan to incentivize your existing team. It also suggests you ask about workforce reductions. Altair Advisers adds a hard fact: a firm may bring in new executives, and “One of them may replace you before you are ready.” Ask what would trigger a change in leadership and how it would be handled. Our post on why private equity wants a team that runs without you explains why this matters to buyers.

How do you check a firm’s track record?

Ask for references from owners the firm has bought from, including owners who left, and look at what happened to those companies. A firm that has treated owners well will not hesitate.

First Citizens says to “ask for references from founders of companies they’ve acquired, and look closely at the outcomes of past investments.” Also ask which fund the firm is investing from and how long it expects to hold your company. Compare answers from more than one buyer. Our guide on how to choose a private equity partner gives a longer checklist.

Who should be on your team before you sign?

Build your team before the LOI. You need a lawyer, an accountant and a financial professional who handle sales of private companies. Add an estate attorney and a wealth adviser for your personal planning.

Altair Advisers says “your business team should consist of an attorney, accountant and financial professionals specializing in mergers and acquisitions.” It adds that many planning steps need to happen before, and sometimes years before, a sale. If you want a banker or advisor, see our guide on working with an investment banker or advisor.

What happens between the LOI and closing?

After the LOI, the buyer runs due diligence, which means a close review of your finances, contracts and operations. First Citizens says the process “is often rigorous and can consume a considerable amount of time from you and your executive team.” Expect heavy negotiation on valuation, earnout structure and the specific terms of the sale.

Plan for the cost too. First Citizens warns that accounting, legal and advisory fees “can accumulate quickly.” A clean set of books speeds this stage. Our post on how to get ready for a quality of earnings report shows what buyers check, and the due diligence checklist for owners lists the documents to gather. If the LOI is right, closing should hold few surprises. If it is vague, surprises tend to appear here.

Which terms should you learn before the first call?

A few terms come up in every conversation with a buyer, and you should know each one before the first call. The glossary defines them in plain words:

• Letter of intent and exclusivity period
• Earnout and rollover equity
• Quality of earnings and due diligence

Reading them first lets you spend your time on judgment, not vocabulary. If you want a view of the full process, see how to sell your business to private equity.

Next step

You are welcome to ask us any of these questions. Start with our deal criteria, then call 713-332-2700 or email connect@capstreet.com for a confidential conversation through /contact.