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Pre-LOI Diligence: Smart Work, Not Hard Work

John Iwanski

Mar 13 2024

3 min read

For mergers and acquisitions, the spotlight is once again shining on pre-letter of intent (LOI) diligence, and for good reason. As deal activity gains momentum, savvy buyers are realizing the importance of a strategic pre-deal approach to ensure they are not merely casting their bids into the wind.

Picture this: A potential buyer, be it a private equity firm or a corporate entity, decides to take a pre-LOI stroll through the due diligence garden. The goal? To identify an enticing asset and conduct a preliminary assessment before officially issuing an LOI. This approach crosses multiple disciplines, involving a meticulous examination that leaves no stone unturned.

But it’s not a full-scale confirmation; rather, a calculated risk.

Pre-LOI diligence may involve a limited but judicious evaluation of information, active participation in meetings and a discerning analysis of available documents to unearth potential risks and opportunities in the transaction.

Financial due diligence providers will critically review the sell-side Quality of Earnings (QofE) report, dissecting valuation metrics and scrutinizing add-backs. The goal is to avoid overweighting bids based on diligence adjustments, creating a foundation of certainty in the succeeding offer.
Operational diligence also joins the pre-LOI party, benefitting from a review of the CIM, observing management meetings and assessing proforma adjustments. It’s a prelude to accelerating prospective value, as buyers strive to understand the nuances of the underlying operations, including headcount, facilities and manufacturing processes.
Tax experts don their detective hats, reading between the lines of financial information to preemptively address tax risks. It’s about optimizing entity structure, strategically positioning for tax benefits, and ensuring that every financial move aligns with the highest and best interests.

So why are buyers opting for pre-LOI diligence?

The answer lies in the ability to craft more prescriptive offers. By delving into the intricacies pre-LOI, buyers can come to the table with a more informed value proposition, gauging the likelihood of completion and investing their time wisely.

From the perspectives of an investment banker and seller, this approach adds legitimacy to a buyer’s intent. It signifies a genuine commitment to the transaction and, consequently, strengthens the bid process. With a looming backlog of deals on the horizon, this strategic pre-LOI diligence becomes a beacon, guiding buyers to focus on transactions with a higher likelihood of completion.

The risk of not performing pre-LOI diligence? Engaging in a transaction with a lower probability of completion, ramping up costs upon issuing the LOI and potentially spinning wheels on a deal that might never see the light of day.

When it comes to mergers and acquisitions, knowledge is power, and well executed pre-LOI diligence can be the secret weapon in securing the deal. It’s not just about being more educated; it’s about being more strategic, more accurate and ultimately, more likely to emerge with a higher chance of a successful outcome. A journey made smoother with the guidance of Sikich’s team of transaction advisors, ready to tackle the complexities of pre-LOI diligence and enhance your chances of securing that coveted deal.

This publication contains general information only and Sikich is not, by means of this publication, rendering accounting, business, financial, investment, legal, tax, or any other professional advice or services. This publication is not a substitute for such professional advice or services, nor should you use it as a basis for any decision, action or omission that may affect you or your business. Before making any decision, taking any action or omitting an action that may affect you or your business, you should consult a qualified professional advisor. In addition, this publication may contain certain content generated by an artificial intelligence (AI) language model. You acknowledge that Sikich shall not be responsible for any loss sustained by you or any person who relies on this publication.

About the Author

John Iwanski

John Iwanski is a principal of transaction advisory services with over 25 years of experience in auditing, consulting, advisory and executive positions specializing in transaction advisory services. As a senior leader, he has demonstrated an ability to work cohesively as a resource to clients across multiple geographies, driving strategic business growth.