We have received several unsolicited letters of intent from private equity firms, but we cannot tell who is a serious buyer with a realistic valuation and who is just trying to tie us up in exclusivity to renegotiate. How do we screen these offers?

Unsolicited letters of intent are often marketing fishing trips designed to tie up your business in exclusivity so the buyer can grind down your price during due diligence. To separate serious institutional buyers from tire-kickers, you must pressure-test their offers and demand specific operational details before signing any exclusivity agreement. Start by asking tough, direct questions about their investment thesis, their typical transaction timeline, and their source of capital. Ask them to explain exactly how they arrived at their valuation multiple and what specific operational assumptions they are making about your business. Demand to speak with founders of other companies they have acquired in the past. If a buyer is hesitant to let you perform this reference check, treat that as a major red flag. By taking a data-driven approach to evaluating these offers, you protect your business from being tied up in a lengthy, distracting due diligence process that ultimately leads to a broken deal or a significant price reduction at close.

Category: Exit Planning