Between the moment a listing catches your eye and the moment you sign a letter of intent (heads of terms in the UK), a deal takes much of its final shape. You agree a price, a structure and a timetable, and you give the seller a period of exclusivity in which you will spend real money checking the business. Rushing this stage tends to cost you later, in wasted diligence fees or in arguments over terms nobody wrote down. This guide takes each step in order: what you are trying to learn, what to ask for and what a sound letter of intent should say.
A letter of intent sets out the main terms on which a buyer proposes to acquire a business, before due diligence and the full purchase agreement. In the UK the equivalent is usually heads of terms.
Heads of terms is the UK name for a short document recording the main commercial terms of a deal before the legal documents are drafted. It is the equivalent of a US letter of intent.
An exclusivity period is an agreed time during which the seller will not negotiate with other buyers, giving you room to complete due diligence and arrange finance.
The steps, in order
Most sales follow a similar sequence, whether or not the seller uses a broker.
- Screen the listing on your own.
- Enquire and sign a non-disclosure agreement.
- Read the information memorandum and the first set of figures.
- Hold a first call with the seller, often with the broker present.
- Send follow-up questions and meet the business.
- Form a view on price and structure.
- Submit, negotiate and sign a letter of intent.
Online businesses sold through marketplaces can compress several of these steps into a few days. Larger, broker-run sales may add a round of indicative offers before a shortlist of buyers is invited to submit a letter of intent. Either way, the questions you need answered before you commit stay much the same.
A business broker markets businesses for sale and manages the process on the seller's behalf. The broker is usually paid by the seller, mostly when a deal completes.
Non-disclosure agreement (NDA)
A non-disclosure agreement is a contract in which a potential buyer promises to keep information about a business confidential. Sellers usually ask for one before sharing the business's name or detailed figures.
An information memorandum is a detailed sales document about a business, usually prepared by the seller's broker or adviser and shared after an NDA. It is written to present the business well, not to test it.
Screen the listing before you enquire
Every enquiry costs time: an NDA to read, a memorandum to work through, a call to prepare for. Spend twenty minutes on the listing first and decide whether it deserves that time. The twenty-minute listing screen sets out what to look at, and How to read a business-for-sale listing explains how listed figures are usually built.
Two free tools help here. Put the listed numbers into the valuation tool to see an indicative range and where the asking price sits against it. Run the listing through the red flag screen to see which areas need questions. Neither gives you an answer. Both tell you where to look.
Before you enquire, prepare a short profile of yourself as a buyer. Brokers screen buyers as carefully as buyers screen listings. A few lines on who you are, what you have run or bought, how you would fund the purchase and your timing will get a faster and more candid reply. Search funders and independent sponsors should say where the equity would come from. A strategic acquirer should explain why the business fits.
The asking price is the price a seller or broker puts on a business when it is listed. It is an opening position, not a valuation, and what it includes varies from listing to listing.
A search fund is a way for an individual or pair of entrepreneurs to raise money, find one business to buy and then run it as chief executive.
An independent sponsor is a dealmaker who finds and negotiates acquisitions without a committed fund, then raises equity from investors one deal at a time.
Signing the non-disclosure agreement
The seller's detailed information usually sits behind a non-disclosure agreement, often called a confidentiality agreement in the UK. It is often the broker's standard form, and it is tempting to sign without reading. Read it, and check:
- what counts as confidential information, and how long the obligations last
- whether you may share information with your advisers, lenders and investors
- whether it stops you approaching or hiring the business's staff, customers or suppliers, and for how long
- what you must do with the documents if you walk away
The restrictions matter most if you already operate in the same sector. A strategic acquirer that signs a broad non-solicitation clause could find it limits normal hiring or selling. Take legal advice where the terms could affect a business you already own.
Once you have signed, do not contact staff, customers, landlords or suppliers without the seller's permission. It is the quickest way to end a process.
The NDA is also the point after which your time and costs start to rise. Much of what a listing leaves out, such as company registry filings, the history of the directors, domain records, reviews and litigation notices, can be checked from public sources before you sign. A Loupe dossier covers these checks on a listed business if you would rather not do them yourself.
Reading the information memorandum
The information memorandum, often called a confidential information memorandum in the US, is a sales document prepared by or for the seller. It is useful, and it is written to present the business well. Read it as an analyst would, with a pen in hand.
Check which period the figures cover: a financial year, a calendar year or the trailing twelve months. Check how profit is defined. SDE, EBITDA and net profit are different measures, and a memorandum may move between them without saying so. See whether add-backs are itemised with explanations or grouped into a single line. Look for revenue split by customer, product and channel, a staff list showing who does what, the lease terms and the stated reason for sale.
Then write a one-page summary in three parts: the figures as presented, the figures you would need evidence for, and the questions the document does not answer. That page becomes your agenda for the first call.
If any figure differs from the listing or teaser, note both versions and ask why. A single change can have a good explanation. A pattern of changes is a warning sign.
Trailing twelve months means the most recent 12 consecutive months of figures, whatever the financial year. It gives a more current view than the last set of annual accounts.
Seller's discretionary earnings (SDE)
Seller's discretionary earnings is the yearly financial benefit a business gives one full-time working owner, before financing costs, non-cash charges and one-off spending.
EBITDA is earnings before interest, tax, depreciation and amortisation. It helps compare operating profit across businesses, but it is not the same as cash.
The first call: what you are trying to learn
The first call is not a negotiation. Your aim is to understand the business and the person selling it, and to leave the seller confident that you are a serious and straightforward buyer. Let them talk. The questions for the first seller call checklist gives a fuller list, but four areas matter most.
Why they are selling
Retirement, health, a move or a new venture are common and credible reasons. A vague or shifting answer is worth probing gently, because it may point to something the seller expects to get worse. See a vague reason for sale.
What the owner actually does
Ask the seller to describe a normal week. Which customers call them directly? Who runs things when they are away? Are any licences, qualifications or supplier relationships held in their name? The answers tell you how much of the business walks out of the door with the seller. Owner dependence and how to test it goes further.
Where the revenue comes from
Ask about the largest customers, how long they have been buying, whether there are contracts, how new customers find the business and how the current year is trading against the last. You are listening for concentration, fragility and momentum.
What the seller wants besides price
Timing, how staff will be treated, a role after the sale, willingness to take part of the price later through seller finance or an earn-out, and a preference between selling shares or assets all shape the offer that will work. Sellers rarely volunteer these, so ask. A flat refusal to defer any of the price is worth understanding before you build an offer around it: see refusal of any seller finance or earn-out.
Avoid naming a price on the first call. If pressed, say you want to understand the numbers before you put a figure on it. Write up your notes the same day and compare what you heard with what the memorandum says.
Seller finance is when the seller lends the buyer part of the purchase price, to be repaid with interest after completion. It is also called vendor finance or a seller note.
An earn-out is part of the purchase price paid only if the business meets agreed targets after the sale. It can bridge a gap between the seller's price and the buyer's view of the evidence.
Follow-up requests and meeting the business
After the call, send a short written list of what you would like to see next. At this stage it is reasonable to ask for:
- monthly profit and loss statements for recent years and the trailing twelve months
- filed accounts or tax returns to compare against them
- a schedule of add-backs with the evidence for each
- revenue by customer, with names anonymised if the seller prefers
- a staff list with roles and length of service
- a summary of the lease and the main contracts
Sellers often hold back customer names, full contracts and payroll detail until after a letter of intent, and that is normal. Refusing to show any evidence that the profit exists is not. See reluctance to share records.
Meet the business before you make an offer. For a physical business, walk the premises, look at the condition of the equipment and watch how staff work with the owner. For an online business, ask for a screen-share of analytics, payment processor reports, advertising accounts and any marketplace account health pages.
Notice the pace, too. A seller with a real timetable is normal. Pressure to make an offer before you have seen basic evidence, or talk of other buyers ready to sign tomorrow, deserves caution. See pressure to skip diligence. A business that has been listed for a long time or relisted several times may have a reason buyers keep walking away, and it is worth asking what happened to earlier offers.
Forming a view on price and structure
Start from your own earnings figure, not the listed one. Rebuild SDE or adjusted EBITDA from the evidence you have seen, and leave out add-backs you cannot support. Add-backs: which hold up and which do not explains how to judge them.
Put your revised figures, along with what you have learned about customer concentration, owner dependence, the quality of the records and the revenue trend, into the valuation tool. The result is an indicative range, not a formal valuation, but it gives you a starting point that does not depend on the seller's asking price. Remember that asking prices are not sale prices.
Then decide how the price would be paid. Cash at completion (closing in the US) is only one part. Seller finance, an earn-out and a lender's loan each change the risk for both sides. Before you make finance a condition of your offer, talk to lenders and check that the business's earnings, after paying someone to do the owner's job, cover the loan repayments with room to spare. Financing an acquisition covers the options.
Structure can close a gap on price. Take a fictional example. Fernbrook Dental Supply, a US distributor, is listed at $2,000,000. The evidence you have seen supports about $1,700,000. The seller believes a new contract will lift profit next year. You could offer $1,700,000 at completion plus an earn-out of up to $300,000, paid only if that contract delivers an agreed level of gross profit over two years. The seller keeps the upside they believe in, and you pay for it only if it arrives.
Finally, be clear about what the price includes. Does it assume a normal level of working capital? Is inventory (stock in the UK) included, or added at cost after a count? Which assets stay with the seller? Working capital, inventory and what the price includes sets out the questions.
Adjusted EBITDA is EBITDA after normalising adjustments, showing what a business would earn with a paid manager in the owner's seat. Larger small-business deals are usually priced on it.
Customer concentration describes how much of a business's revenue comes from a small number of customers. The higher it is, the more the business depends on decisions it does not control.
Working capital is the money tied up in running a business day to day, mainly stock and money owed by customers, less money owed to suppliers. A sale needs to agree how much of it comes with the business.
What a letter of intent should cover
A letter of intent sets out the main terms on which you intend to buy. Most of it is usually not legally binding, but it frames the purchase agreement and every negotiation after it. A sound one covers:
- the price and its basis, for example a price for the business on a cash-free, debt-free basis with a normal level of working capital
- how the price is paid: cash at completion, seller finance with its rate and term, any earn-out with its measure, period and cap, and any amount held in escrow or held back
- the structure: an asset purchase or a share purchase (a stock purchase in the US)
- what is included and excluded, such as equipment, inventory, intellectual property, domains, vehicles and property
- how working capital and inventory will be measured at completion
- conditions, such as satisfactory diligence, finance approval, landlord consent to a lease assignment and consent from key contract counterparties
- exclusivity: how long it lasts and what the seller agrees not to do during it
- a timetable for diligence, legal documents and completion
- the seller's transition support: how long, how many hours a week and whether it is paid
- the seller's undertakings not to compete or approach staff and customers after the sale
- confidentiality, who pays which costs, and the governing law
- which clauses are binding, which typically include exclusivity, confidentiality, costs and governing law
Say plainly which parts are binding and which are not. If the letter is unclear on this, a court may read more of it as binding than either side intended. Detail now saves disputes later. Vague wording on working capital or on how an earn-out is measured is a common source of argument at completion. Ask a lawyer (a solicitor in the UK) to review the letter before you sign, even though most of it is not binding.
Cash-free, debt-free is a pricing basis in which the headline price assumes the business changes hands with no cash and no borrowings. The seller keeps the cash, repays the debt and leaves a normal level of working capital behind.
Escrow is an arrangement in which an independent third party holds money until agreed conditions are met. In a business sale it keeps part of the price available to cover claims after completion.
Negotiating and signing
Do not offer a high price to win exclusivity with a plan to cut it after diligence. Brokers and sellers recognise the tactic, and it erodes the trust you will need through completion and any transition period. If your price depends on assumptions, say so in the letter: for example, that the price is based on the trailing twelve months' earnings as presented and may be revised if diligence finds material differences. Then any later change rests on evidence rather than surprise.
Ask for an exclusivity period long enough to complete diligence and secure finance, with a timetable both sides can see. Too short and you will be rushed. Too long and the seller will resist, or grow restless partway through.
If the seller counters, go back to what you learned about what they want. A seller who cares most about their staff, their timing or a clean exit may accept a lower headline price in return for better terms on the things that matter to them.
Once the letter is signed, the work changes from judging whether to buy to proving that you should. Due diligence: what to check and in what order picks up from here.
A transition period is the agreed time after completion when the seller stays involved to hand over knowledge, relationships and processes to the new owner.