As tighter financing conditions, valuation gaps and heightened M&A risk continue to shape dealmaking, due diligence conducted prior to a Letter of Intent has emerged as a central factor for many buyers.
Whereas such early checks might previously have been lumped under the informal umbrella of “kicking the tires”, pre-LOI due diligence is now an essential and highly structured part of M&A processes.
The rationale is simple: pre-LOI due diligence helps buyers (and often vendors) to decide very early on whether a transaction is worth pursuing, as well as to determine a more accurate valuation.
If the two parties move on to sign a Letter of Intent, then that early stage due diligence can provide greater certainty that the deal will proceed to completion. If not, then both parties have saved valuable time that might have been wasted had they proceeded any further with a transaction that was never going to work.
However, pre-LOI due diligence is also a balancing act. As competition for targets intensifies, buyers need to ensure that their early stage checks don’t enable rival bidders to steal a charge on them and enter exclusivity while they’re still conducting their initial due diligence.
This means that buyers conducting pre-LOI due diligence need to proceed with a clear strategy outlining what they are going to be looking at and what can be left for the full, post-LOI due diligence due process.
In this guide, we’ll look at the reasons behind the rise of pre-LOI due diligence, outline what should be examined early on and what should be left for later and provide an example framework of a pre-LOI due diligence process.
The rise of pre-LOI due diligence
While buyers have traditionally been seen as reluctant to expend time or money on due diligence prior to agreeing exclusivity with a target, the practice has become increasingly common over recent years.
Rather than just an informal process, pre-LOI diligence is now often a deliberate phase in M&A and something that many buyers now see as providing a competitive advantage, as opposed to an unnecessary use of time and resources.
There are a number of core reasons why this shift has occurred, but the primary one may be growing risk aversion. Over the past decade due diligence has become more intensive, amid regulatory changes, increasing awareness of ESG factors, growing digitisation and mounting risks both economic and geopolitical.
One of the effects of this has been a significant lengthening of average due diligence timeframes. The rise of pre-LOI due diligence can also be linked to this riskier environment and the process can potentially serve to prevent full due diligence checks from taking too long.
Much of the discussion around pre-LOI due diligence has occurred in the years since COVID-19, in which macroeconomic and geopolitical risk factors have become more prevalent and buyers (from mid-market strategic acquirers to private equity firms) have become more cautious.
These early checks can provide a buyer with greater confidence to proceed with a deal, ensuring that it makes strategic and financial sense. In such uncertain times, this could prove invaluable in getting a deal over the line.
From a financial perspective, there are clear reasons to undertake pre-LOI diligence. With financing conditions tighter amid higher interest rates and persistent inflation, buyers are more likely to be experiencing pressure on their margins.
As a result, greater financial discipline is required. Buyers need to ensure, firstly, that the deal is doable within their financial strictures and, secondly, that is worth doing. Early scrutiny of a target's earnings quality and overall strength can provide insight into not only whether a deal is feasible, but also whether it is an opportunity to pursue or something that would risk overpaying for a weak asset.
One of the most persistent problems buyers and vendors currently face is the prevalence of valuation gaps. Tighter finances and heightened risk aversion means many buyers are valuing businesses more conservatively, while vendors who have been waiting for the right time to sell (potentially waiting years) are often determined to not move far from their own ideal valuation.
Pre-LOI due diligence provides buyers with an early opportunity to assess and refine their valuation. The findings may provide vindication for their own valuation, helping them to justify a more favourable price or structure. Alternatively, they may come to view the vendor’s valuation more positively, helping to facilitate compromise on both sides when it comes to pricing negotiations.
On a related note, pre-LOI due diligence can also help to reduce the risk of later retrading, a common cause of deal failure. If a buyer and seller broadly agree on a price prior to the buyer undertaking due diligence, then there is a high chance that they will use their findings to try and negotiate a lower price.
This can of course seriously drag out the deal timeframe and can even lead to one or both of the parties walking away from the transaction. Sellers, through frustration at attempts to reduce the price and buyers if a seller is unwilling to move towards the lower valuation that they feel is more accurate.
Conducting due diligence prior to an LOI reduces the risk of both the buyer uncovering surprises that could affect their valuation or derail the deal, or of buyers simply using due diligence as a means of reducing the price in bad faith, having never intended to come close to the initial valuation.
Pre-LOI can also aid in making a deal more forward-looking. Integration risks are, justifiably, becoming more prevalent among buyers (as well as among sellers, with more deals featuring earnout structures that tie the ultimate consideration into post-sale performance), meaning much modern due diligence is focused on understanding and planning for the post-deal period.
Modern due diligence processes increasingly examine factors such as execution risk, cultural alignment, supply chain resilience, regulatory compliance, ESG credentials, technology differences, cybersecurity systems, skills gaps and scalability.
Certain similar elements can be ascertained through pre-LOI due diligence, for example: market position, repeatability of sales, founder reliance. This can provide an early idea of cultural fit and potential integration issues, helping to shape the structure of negotiations and post-sale planning.
Finally, on a more practical note, pre-LOI due diligence has become more common amid a rapid increase in the scale and sophistication of the technologies and digital tools that dealmakers now have at their disposal.
Technologies such as AI-enabled analytics now empower buyers to analyse and test financial and operational data on a scale, at a speed and at a price point that simply didn’t used to be viable.
As a result, it now simply makes sense to conduct certain checks and tests (even from a very limited data set) as early as possible, rather than waiting until exclusivity is granted, in order to get an instant read on whether the deal is worth pursuing.
The pre-LOI due diligence process
While a pre-LOI due diligence process should be light, it is also vital that it is structured and disciplined in order to be worthwhile. A lack of exclusivity and access will naturally limit what can be examined, but it is also important to know in advance what to look for.
For that reason, buyers conducting pre-LOI due diligence should clarify their process and key objectives beforehand.
The typical objectives might include: gauging whether the business is a strategic and cultural fit; uncovering obvious deal-killer risks; validating key financial metrics (margins, cash generation, growth etc); establishing whether a valuation/pricing structure is defensible; refining key conditions for the LOI.
However, it is also important to establish limits and guardrails from the outset, to ensure the process is focused and respectful of the vendor’s boundaries at such an early stage.
For that reason, buyers should not place an overly onerous document burden on sellers. A detailed analysis of financial and legal documents within a data room can wait for the full due diligence process. Pre-LOI due diligence should focus instead on high-level information, the kind of headline figures that provide an overarching view of the company’s financial position.
Over-investing in the process is also something to avoid, while some outside assistance may be advisable on certain aspects, engaging third-party experts and advisors to closely examine the target would be overly costly (especially given the limited data likely to be available), intrusive and time-consuming.
The core areas to focus on
Strategic and commercial fit[/i] - An examination of the target’s products and services, customer segments, value proposition and differentiators, as well as the competitive landscape it operates in, can provide critical insight into how a deal would fit into the buyer’s strategic and commercial aims.
During pre-LOI diligence, buyers should aim to gain more clarity over how a potential deal would address critical aims: would it enable the buyer to move into an adjacent service area? Would it fill a capability gap? Would it enable entry into a targeted market or region?
Headline financial health - Requesting summary profit and loss accounts covering a period of, say, 3 to 5 years up to the most recent year-to-date, will provide a basic breakdown of its revenue and margins.
A few targeted questions regarding cash generation, working capital patterns, seasonality and capex intensity, can also give a buyer greater understanding of the target’s financial health.
This is likely to be one of the most sensitive areas of a pre-LOI diligence process, so it is important to respect the vendor’s boundaries in order to not sour the deal. If a seller is reticent about providing any information, a simple NDA can provide reassurance and build trust.
Business model and revenue drivers - To gain insight into how the business operates and how it generates revenue, buyers should seek to understand the overarching makeup of its revenue model. Buyers should look to establish a few key points, such as the target’s pricing model, whether revenue is recurring or project base, contractual or transactional.
Gaining an understanding of customer concentration, customer churn and retention, average contract length, sales cycles and the quality of the target’s pipeline can also provide important information regarding the quality and resilience of its earnings.
People, culture and organisation - Cultural integration issues are one of main causes of post-deal failure, so it is important to get an early understanding of whether the target business is going to be a strong fit with the existing business.
The first thing to look at will be the target’s ownership structure. A few questions regarding the role of the owner/founder and their plans moving forward, as well as the depth of its management team, can provide insight into whether the business is owner-dependent, or governed by a strong team.
Moving on to the company’s general staff, asking about headcount, responsibilities and functions and key people can provide a broad overview of how the workforce operates, while looking at employee turnover can flag any potential retention issues that might crop up.
Red flags - Buyers should also look for any headline red flags that might mean a deal should be avoided, asking the seller explicitly about any “skeletons” that would be uncovered fully during the later due diligence process.
This might include ongoing disputes or investigations, licensing issues, regulatory or compliance issues, major claims, unresolved audits or tax arrears.
Operational capability and systems - Pre-LOI due diligence should also be used to look at the target’s locations, build an understanding of its key assets (for example, owned or leased plant or property, critical equipment), its IT infrastructure and cybersecurity systems.
Looking at some of these factors can provide insight into potential capacity constraints, fragilities or gaps within its processes, as well as any dependencies on single suppliers.
Industry/external context - Prior to signing an LOI it is also important to take the opportunity to examine the broader framework that the target operates in. Buyers should look at key industry trends, growth, disruption, critical headwinds (e.g. macroeconomic, geopolitical, regulatory) and how these might impact the business going forward.
This can help to flag obvious risks, such as if the business is operating in a market that is particularly exposed to certain headwinds or cycles.
Anticipating seller resistance
It is important to recognise that many sellers will have legitimate concerns about extensive pre-LOI enquiries, particularly in the UK mid-market where owner-managers may be navigating a sale process for the first time.
Even with an NDA in place, vendors will often worry about commercially sensitive information being shared too early, potential disruption to day-to-day operations and the risk that a buyer undertakes detailed analysis, then simply walks away having gained valuable insight at no cost.
Reasonable seller resistance typically manifests as a preference for high-level data at this stage, rather than full transparency. That might mean providing anonymised or banded customer information, summary P&Ls rather than detailed management accounts, narrative descriptions of disputes and regulatory issues instead of full files, and a clear line that certain information (e.g. in-depth contract review, detailed pipeline analysis and full legal or tax diligence) will only follow once an LOI and exclusivity are in place. In many cases this is simply good-faith risk management, as opposed to an attempt to conceal issues.
Buyers should therefore distinguish between proportionate caution and more troubling signs of evasiveness. A seller who is unwilling to share any historic financial summaries, who repeatedly changes or contradicts headline figures, or who refuses to answer direct, high-level questions on obvious red-flag areas (e.g. tax arrears, major claims or extreme customer concentration) may be signalling that there are underlying problems which will only become more expensive to address later.
In such situations, buyers may need either to step back entirely or to reflect the heightened uncertainty in a wider valuation range, heavier use of earn-outs and specific conditions in any subsequent LOI.
What to leave for the full diligence process
Most of the heavy, intrusive work should be left for post-LOI confirmatory diligence, once exclusivity is in place. At that stage, the buyer can use the deeper level of access to run more complete, specialist reviews without over-burdening the seller or stalling competitive tension.
In post-LOI is typically when the buyer commissions a full financial QoE, detailed working capital and net debt analysis, along with robust testing of the normalised earnings base.
It is also the point for comprehensive legal, tax, and regulatory diligence, including reviewing key customer and supplier contracts, employment terms, IP, real estate, licences, and any litigation or compliance issues in detail.
Operational, IT/cyber, HR and pensions, environmental/technical, and insurance reviews are usually pushed to post-LOI as well, often with the involvement of third-party experts.
Finally, the full due diligence phase is where a buyer can refine integration plans, synergy cases, as well as any restructuring or remediation actions based on the deeper findings, feeding directly into the SPA, covenants, and closing conditions.
Conclusion
For years, the majority of checks conducted prior to the signing of an LOI were informal and narrow in their scope, with many buyers feeling such a process was a waste of time and resources and many vendors likely viewing anything other than “kicking the tyres” as intrusive.
Now though, in a more fragile M&A environment, pre-LOI due diligence has emerged (for many buyers) as an essential process. A process that can ultimately drive time and cost savings by providing insight into whether a deal is worth pursuing, helping to shape more accurate valuations and smoother negotiations and providing an early indication of the key factors to address during integration.
While conducting pre-LOI due diligence doesn’t mean that a buyer can cut corners when it comes to their full investigation, it can result in a more focused, streamlined analysis, while mitigating some of the risks that can commonly lead to deal failure.
For all these reasons, pre-LOI due diligence is a trend that is here to stay and one that buyers shouldn’t ignore.
Suggested pre-LOI pack:
Summary financials
3–5 years summary P&L and latest YTD, basic revenue breakdown (by product, customer type, or geography).
Indicative balance sheet at latest year-end and high-level capex history.
Customers and revenue quality
Top 10–20 customers by revenue (names may be anonymised at this stage), including approximate tenure and contract type.
Overview of key contracts (term, renewal mechanics, termination rights, pricing mechanisms).
Organisation
Org chart showing key roles, with tenure and whether they are critical to future performance.
1 - 2 conversations with key figures from second-tier management
Legal and risk
Short list of any material disputes, claims, regulatory issues, or environmental exposures.
This can usually be supported by 1–2 management sessions to walk through the materials and test consistency.
Operational
Information on critical suppliers, tech and cybersecurity systems and providers
Key sites and equipment: A site visit (potentially with a third-party assessor) can provide a broad overview
A 10-step, end-to-end pre-LOI scenario:
1. Clarify the deal thesis
Define why you are interested in this asset (market entry, capability, bolt-on, roll-up).
List the 5–7 “must be true” factors (e.g., recurring revenue %, margin level, customer stickiness) and use these to set the scope for pre-LOI checks and to avoid generic, unfocused questioning.
2. Run an initial desktop screen
Review public information: website, Companies House filings, press, reviews, visible customers/partners.
Scan market and competitors to confirm basic attractiveness and identify obvious red flags (regulation, concentration, disruption).
Decide “drop or proceed” and, if proceeding, confirm what you need before you could sign an LOI.
3. Agree the pre-LOI ground rules
Put an NDA in place and position this as limited-scope, pre-LOI diligence, rather than a full diligence exercise.
Align with the seller on timing, information burden, and who will be involved in early discussions.
Share a short one-page brief explaining what you’ll look at now vs what will wait for post-LOI exclusivity.
4. Request a concise pre-LOI information pack
Send a focused list rather than a full data-room request, typically including:
- 3–5 years summary P&L and latest YTD, with basic revenue/margin breakdowns.
- Top 10–20 customers by revenue (names anonymised if needed) with tenure/contract type.
- High-level org chart and key roles.
- Brief description of sites/assets and any known disputes, investigations, or regulatory issues.
Confirm format (Excel/PDF) and delivery method (email or light VDR) to ensure efficiency.
5. Hold an initial management call
Use the first structured call to:
- Understand history, recent performance, and owner motivations.
- Test headline metrics (size, growth, margins, customer types) before investing too much analysis time.
- Capture soft points: culture, management depth, and integration appetite.
Refine your “must be true” factors based on this call.
6. Run targeted workstream reviews
Assign small internal workstreams (financial, commercial, operations/IT, legal risk) with tight scopes.
Financial:
- Trend revenue, gross margin, EBITDA, by main segments over 3–5 years.
- Identify obvious normalisation points (owner comp, one-offs) and get to a rough run-rate earnings figure.
- Ask directional questions on working capital and capex intensity.
Commercial/strategic:
- Analyse revenue mix (product, customer, geography) and top-customer concentration/tenure.
- Check market size, growth, competitive position, and any regulatory or technological overhangs.
People/operations/IT:
- Review the org chart for key-person risk and succession depth.
- Map core locations, facilities, key suppliers, and headline operational dependencies.
- Get a basic read on core systems and data quality, and any glaring cyber/compliance issues disclosed.
Legal and other headline risks (no deep contract review yet):
- Confirm corporate structure, key licences, and any ongoing or threatened disputes.
- Ask explicitly about known legal, tax, environmental, or regulatory issues that could be deal-killers.
7. Hold a focused Q&A / second call
Circulate structured questions from each workstream in advance.
Use the call to walk through the information pack, resolve inconsistencies and probe the biggest value and risk drivers.
Capture any additional data points you need to finalise your pre-LOI view (e.g., simple cohort metrics, key contract terms at a high level).
8. Build the pre-LOI fact pack and risk register
Consolidate findings into a short fact pack: business overview, market, financial summary, customers, team, operations, headline risks.
Create a risk register with categories such as “probable deal-killers,” “pricing/structure issues,” and “confirm post-LOI.”
For each risk, list potential mitigants (price adjustment, earn-out, conditions precedent, integration actions).E.g.: “Customer concentration: top 3 at 55 per cent of revenue → mitigate with lower upfront multiple, earn-out tied to retention and specific diligence on contract terms post-LOI.”
9. Set valuation and structure guardrails
Take your run-rate earnings and apply a realistic multiple range based on quality and market evidence.
Adjust for major risks and for likely value-creation levers to arrive at:
- A “walk-away” price,
- A target price range for the LOI,
- A preferred structure (e.g., % cash vs earn-out or rollover; any vendor loan; high-level view on working capital mechanics).
Align internally on these guardrails before LOI drafting.
10. Translate into LOI terms and post-LOI plan
Draft the LOI using conditional language and explicitly referencing that final price and terms are subject to confirmatory due diligence.
Include key economics (price range and structure), exclusivity period, and a clear description of the post-LOI diligence scope and timetable.
Where you’ve identified specific risks, embed protections (for example, targeted conditions, bespoke indemnities to be reflected in the SPA, or information delivery requirements).
In parallel, sketch a high-level post-LOI diligence workplan aligned with your risk register, so you can start quickly if the LOI is accepted.
This established garage in West Sussex, with a solid reputation since 2001, offers MOT servicing and repairs backed by an experienced management team.
For sale is an award-winning AA Rosette Bistro and Bottle Shop located in the heart of an affluent Greater Manchester village.
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This is a unique opportunity to acquire a leading UK-based specialist in premium ergonomic seating and designer furniture, with strong brand recognition and diverse revenue streams across retail, repair, and restoration.
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