From letter of intent to closing

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Where the leverage sits, and when it moves

The leverage curve

A seller's leverage peaks the moment before exclusivity is granted and declines steadily after it. Before signing, there is at least the possibility of another buyer. Afterwards there is one counterparty, a growing sunk cost in professional fees, and a business whose staff and customers may be starting to sense something.

Every subsequent negotiation, over the working capital peg, over escrow and indemnity limits, over diligence findings, happens on the downward slope of that curve. Which is why the letter of intent matters far more than its non-binding status suggests.

Exclusivity

Exclusivity is what the buyer is really asking for. They are about to spend money on accountants and lawyers and will not do it while competing.

That is reasonable. Open-ended exclusivity is not. It should run for a defined period tied to a realistic timetable, and it should end automatically rather than requiring the seller to terminate. Extensions can be granted when progress is real. The distinction between a period that lapses and one that continues until someone objects is the difference between a process the seller controls and one they do not.

What to settle in the letter

Price, obviously, and how much of it is cash at closing rather than deferred, since those are different offers however similar the headline. The treatment of cash and debt in the business. The working capital mechanism at least in principle. Whether real property is included. What the seller is expected to do after closing, for how long and for what. The expected level and duration of any escrow. The financing plan and its timetable. And the exclusivity period itself.

A seller who leaves these to the definitive agreement is choosing to negotiate them from the weakest position they will occupy in the whole transaction.

What happens next, in order

Confirmatory diligence begins, usually financial first and then legal, commercial and sometimes environmental where property is involved. The buyer's lender runs its own process in parallel and will want its own view of the earnings.

Drafting of the purchase agreement begins once diligence has produced enough to draft around. The disclosure schedules follow, and they take longer than anyone plans for. Third party consents run alongside everything else and are the most common source of delay, because landlords, franchisors and key customers have no incentive to hurry.

Signing and closing may be the same day or separated, and where they are separated the period between them needs its own rules about how the business is run.

Confidentiality throughout

The risk a seller carries during this period is not mainly legal, it is operational. If staff learn the business is being sold before there is anything definite to tell them, the best of them start looking. If customers learn, competitors will hear within the week.

Confidentiality agreements are necessary and insufficient. What actually protects a process is limiting who knows, staging what is disclosed against how committed the buyer has become, keeping the most sensitive material back until late, and having decided in advance what will be said if someone asks. A process that leaks does not usually collapse. It just closes at a lower price.