The Search Fund LOI Checklist

As the summer kicks off, many searchers are close to signing an LOI after receiving broker CIMs mid-spring. After helping 60+ searchers over the past six years with commercial due diligence I wanted to write an informative blog post providing searchers with a clean checklist of diligence items and raw data that should be requested upon signing an LOI. Many searchers reach out for help with diligence upon signing an LOI with little information on the business, which materially reduces the probability of the transaction closing. Private equity firms are not signing up assets without verifying monthly financials, digging into the seller's one-time addbacks and personal expenses (especially when those small, unsophisticated brokers are involved), and evaluating customer concentration. In addition, the seller probably has summer vacation plans and many searchers themselves take time-off during the summer months (you deserve a break too), all of which can delay confirmatory diligence and put a transaction at risk. Remaining organized and digging into the highest priority diligence items around the LOI stage can save significant time and be the difference between a closed deal in ~90 days or a dead deal in 6 months. As diligence drags on, searchers lose track of time, rack up third-party transaction costs, and the odds of closing diminish. I hope you find these tips useful as you near signing an LOI and have a great summer. Happy searching!

Communicate with your Lead Investors

It's one of the first questions I ask every searcher when they sign up a deal. "Have you discussed the opportunity with your lead investors and do you have the greenlight to spend time on the deal and dig-in?". Far too often searchers respond with "one of my investors

thought it was interesting and I should proceed" or "I briefly mentioned it to my cap table a month ago but it seems like they are supportive." An area I struggle with the current traditional search model is the search fund of fund investors are making heavily diversified bets on dozens of searchers to find that 'home run' deal with outsized return potential and, as a result, are writing smaller equity checks. Many of these funds have teams of 3-4 people with no junior staff, making it extremely challenging to receive investor feedback / appetite pre-LOI. I highly encourage searchers to hop on calls with their top 4-5 investors prior to signing an LOI to ensure they like the industry, valuation, and opportunity at a high-level. I've seen way too many search deals die due to gap equity challenges and investors backing out of deals (given they've committed to so many searchers and can only do less than 50% of the opportunities shown to them). An easy way to mitigate this risk is by communicating with your investors that own 15-20% of your cap table upfront. A quick 'no' (while painful) is much better than a long drawn out 'no'. If you're looking at a dermatology deal and your lead investor completed a dermatology transaction a few years ago that hasn't gone well chances are they do not want additional exposure to a subsector that has been challenging for them. No investor will blindly sign-up their pro-rata equity after reading a teaser, but it is important to gauge interest levels early before you formally sign an LOI. Each investor has their own portfolio, subsector concentration, and key themes that they invest behind so it is important to receive that feedback from your top five investors ahead of signing a formal LOI.

Monthly Financials In Excel

I am seeing a lot of searchers sign LOI's without actually receiving raw financials ahead of obtaining exclusivity. This is going to make your life very hard for two simple reasons: (i) if you don't have key financial information to draft an informed letter of intent and if the seller is slow in getting you raw data you already know that the diligence process will take much longer than 90 days. Time is the #1 killer of deals and many of these business owners are not used to working at such a rapid pace in providing diligence requests on top of managing their day-to-day operations. It is important to gather as much information from the seller as possible (in excel) prior to signing an LOI so you have a better understanding of the business and its trajectory. (ii) how can you possibly submit an LOI and a valuation when you don't know what true EBITDA is? I can guarantee you that EBITDA is not what the small-town business advisor or broker is representing it to be. I hear this all of the time: "the seller told me he wants 7.0x EBITDA". Okay, no problem, but 7.0x on what? A 7.0x valuation on heavily adjusted EBITDA, seller discretionary earnings (my least favorite term that doesn't exist in institutional private equity), on 2026 budgeted EBITDA, LTM EBITDA, or on pro forma run-rate adjusted EBITDA? Typically the seller has a number in mind whether it is an enterprise value or an EBITDA multiple. You can't possibly sign an LOI without understanding what EBITDA really is (of course to be validated by a QoE later). I often see searchers sign LOI's with just raw annual PDF's and chicken scratch notes from the seller on what addbacks and adjustments there are to bridge to their heightened EBITDA figure. 9 times out of 10 EBITDA comes in lower than the seller represented after you do a proper cash to accrual conversion and conduct a full Quality of Earnings report. The challenge is by digging into an accurate EBITDA calculation too late you then look like you are re-trading the seller on valuation mid-way through the diligence period. Asking the seller to take a reduced purchase price based on the new EBITDA figure calculated typically leads to a loss in trust with the seller and a dead end. My advice is always request monthly P&L financials in excel for the past few years and YTD immediately - this should be your #1 request from the seller so you can understand real-time trends in the business. We are already into June 2026. You should not be signing an LOI based on the company's actual 2025 performance or what the seller claims 2026 budgeted EBITDA to be. The former number is stale and the latter is fake. This is a dead end. Get monthly financials and evaluate a potential valuation based on LTM April or May 2026 financials (in this example) depending on how quickly the owner can close the books for the latest reporting period. This will save you a huge headache down the road and hopefully condense the diligence period needed upon signing the LOI. The takeaway is simple - don't accept the 'EBITDA' presented by the broker or seller and always request monthly financials in excel including the latest month available as soon as possible. No private equity firm is signing an LOI based on financials that are five months old or on a one-page PDF with handwritten one-time EBITDA adjustments and you shouldn't either.

Diligence Request List

Chances are the seller has never gone through a sale process before. It's their first time and they're going to be overwhelmed. Many of these businesses with less than $3 million of EBITDA don't have proper systems in place and have a small team with limited resources. The owner may be keeping the sale process confidential or have very few employees who are aware of the transaction and helping with diligence. As a result, it is incredibly important to send a smaller, digestible high-priority request list upfront before sending a more comprehensive diligence request list with 150+ items. I've seen searchers blast-off a generic templated 150+ item request list to owners immediately after signing an LOI. This typically does not work unless the seller specifically asks for it upfront. You are going to overwhelm the owner and they may even second guess if they want to go through with a sale process at all when they realize how much work it is going to be and their summer may be ruined. I always encourage searchers to send a brief 10 bullet email to the owner on the highest priority items they need to kick-off commercial diligence. These items typically include: Monthly P&L financials in excel for the past three years (as noted above), year-end balance sheets for the past three years, a list of capex or technology investments over the past 24 months, revenue by customer for the past three years (evaluate any potential customer concentration upfront), a breakdown of service mix or end market mix, an org chart (evaluate what holes will you need to fill or upgrade), and any other relevant sector-specific KPI's. Another request I always tell searchers to send to the owner is any marketing materials that are used externally with prospective clients. This will give you insights into how the company positions its value-add to customers and differentiates itself in the marketplace, both of which are helpful to fast-track how you should be thinking about positioning the business / brand post-closing. Sometimes these small businesses don't have any marketing materials or even a website - great, that's the easiest growth lever to pull post-closing from a value-creation perspective. Takeaway: be efficient with the seller's time and do not overwhelm them. Send the highest priority requests upfront and once you obtain the key raw data required to begin diligence it then makes sense to send the next batch of requests.

Plan to Receive Lender Term Sheets

Many searchers sign an LOI and believe they will not need third-party debt or a lender process may take too long and delay post-LOI diligence. Searchers may have a small seller note or believe there is significant equity appetite from their cap table, thus no third-party debt will be required to close the deal. You are setting yourself up for a long diligence process. It is much easier to loop in a few lenders early on in the post-LOI diligence period to assess the opportunity even if you may not utilize debt. Far too often a searcher is four months into their post-LOI period and trying to round up gap equity. They may have convinced the seller to provide an attractive seller note with PIK interest or minimal cash interest and no covenants. All of a sudden the seller realizes the note is 'at-risk' and they may have no control in how the business will be run over the next few years. They get cold feet and no longer want to provide the seller note. Or a lead investor pulls out of the deal due to X, Y, Z concerns and you are left with a meaningful gap in capital required to close the deal. I always recommend that searchers should reach out to 3-5 lenders who are familiar with the search space early in the post-LOI process. Dual-path the equity and debt raise. Best case scenario you have plenty of optionality and can utilize a mix of debt and equity or maybe you have enough capital between your cap table equity and a seller note to close the transaction. But I've seen too many searchers plan to close a transaction without debt and then four months in they are panicking and scrambling to reach out to lenders who have never met them. Search lenders move slowly and these are small, risky businesses. A lender's typical diligence timeline will take at least 4-7 weeks to get up to speed on you and your background, the opportunity, and provide a real term sheet with all of the bells and whistles you need to make a decision. I encourage searchers to have a short list of lenders upon signing the LOI and as you build the investor presentation and LBO model provide materials to the lender early in the process as a back-up option in case you may need debt to close the deal or fill a capital need. If you show an opportunity to debt providers four months into the LOI process and the seller realizes you don't have the funding to close the deal chances are they may walk away (I would to) or pursue another buyer. There is nothing wrong with receiving a few lender term sheets mid-way through the diligence process and having options. It will make your life much easier later in the confirmatory diligence phase as you finalize sources and uses.

Gap Equity

A similar theme to the lender topic above, I always encourage searchers to have more options than fewer. If you need to raise less than $5.0 million of equity as a traditional searcher to close a deal this topic may not pertain to you as that check size is fairly feasible to close your transaction promptly. If you are raising $10-20+ million of equity I typically encourage searchers to start gap equity conversations immediately. I am seeing many traditional search investors take their pro-rata in transactions, but investors are rarely taking above pro-rata or mopping-up excess equity. As a result, if you have even 1-2 investors pass on your deal, chances are you may need to go out and find another search investor or family office to fill the gap. It is much easier to begin those conversations at the time of the LOI signing and have optionality as opposed to waiting 60+ days into diligence and then scrambling to find a few million dollars to close the deal. In my experience this only pushes out the potential closing and could likely cause the deal to fall apart, especially if the seller catches wind that you do not have sufficient funds to close the transaction or diligence is not progressing. If you are raising substantial equity focus your efforts on your lead investors and find gap equity from family offices or larger search investors that can write $3.0-5.0 million equity check - the $100K checks are great, but will ultimately take too long to raise and close your deal.

Board Members

If you are a searcher specializing in 2-3 subsectors as opposed a generalist search you should be building a value-added operator network very early on in your search process. Many searchers will sign an LOI and 60 days into exclusivity their lead investors will ask about the composition of the board. If there is an area that I truly believe will evolve within the search ecosystem it is board members - both who they are and how they are compensated. In traditional private equity there are board members and board observers. Some of the larger limited partners or co-investors will be a board observer on a deal. They'll join occasional board meetings on Zoom or in-person, meet the management team, and outside of maybe any value-added introductions or suggestions, remain relatively quiet and out of the management team's hair. Board members should be boots-on-the-ground and heavily involved in driving growth at the company. They are often paid on an annual basis and sometimes receive upside beyond the annual board fees. Many searchers tell me "the board will probably be comprised of myself, the seller / founder, and my largest three investors." So, you're telling me you've never operated in the subsector yourself, the founder is rolling out of the business post-closing (no alignment), and your three largest investors have no specialization in the subsector and are also on 70 other active boards? Who is driving value? I always encourage searchers to find at least one, if not two, outside board members that they've met while searching at industry conferences or trade shows - real seasoned operators who can make customer introductions, understand how supply chain works within the niche sector, can assist with price negotiations in contracts, and understand the perspective of larger strategics or customers in the category. I personally would categorize most search investors as being more of a 'board observer' than 'board member' unless someone has significant capacity / availability and specialization in a niche market that directly applies to your deal. They want to see how their investment is doing, appreciate regular updates and access to materials, and likely don't mind collecting the tiny annual board fees. Board observers are great - they're free, they may provide an outside, unbiased perspective, and they're low maintenance. You should be selective with true board members. These should be industry veterans with 20+ years of operating in the pharmaceutical industry or commercial landscaping. They shouldn't be the generic LP investor that has 150 active investments and they're sitting on 25 boards themselves. They're too busy to be in the weeds and actually understand what is going on with your deal post-closing and they likely won't add much value. Not to mention most of the search investors who actually respond to my email had incredibly successful searchers 15 years ago and are semi-retired. They want to travel in the summer not fix your supply chain problem. I also suggest incentives for board members who you want to be involved for 5+ years or the full hold period - a simple salary does nothing from an alignment basis, whereas a small percentage upside or sweat equity may make a board member really work on driving sales growth or cutting costs to improve margins - initiatives that should drive a larger enterprise value (and equity value) at exit.

Conclusion

Searchers always ask if they should submit several LOI's and parallel path deals or focus on one single live opportunity. In my opinion, you are better off focusing on quality over quantity. Pick a high-quality business / opportunity, understand the seller's motives, do a reasonable amount of pre-LOI diligence to really understand the growth prospects, value-creation potential, and sharpen your pencil on valuation. If you collect raw data from the seller pre-LOI it will significantly speed-up your commercial diligence process post-LOI as well as de-risk the chances of a dead deal. The majority of post-LOI dead deals that I've witnessed are related to a lack of diligence and underwriting around the LOI stage. The searcher anticipates having ample time during the exclusivity period to complete all diligence, however, many underestimate the time it takes to properly manage your investors, find gap equity, pitch the deal to lenders, manage third-parties (QoE, RWI, insurance & benefits), and lead legal negotiations with your counsel. Many searchers are building an investor presentation or full LBO returns model for the first time which only adds to the growing pains throughout the diligence process. RiverStone Reporting has helped over 60+ searchers with diligence including more institutional investor presentations, robust LBO models, KPI analytics (retention / churn, cohort analysis, employee turnover, customer trends, etc.) to ultimately reach a successful closing. Reach out to our RiverStone Reporting team today (Eric@RiverStoneReporting.com) if we can be of help during your diligence process. Good luck searching throughout the remainder of 2026!