The biggest mistake founders make after signing a Letter of Intent (LOI) is assuming the deal is done. They fail to prepare for due diligence, a critical process where buyers verify financials, contracts, and operations. This oversight can lead to delays, reduced valuations, or even the deal falling apart.
Key takeaways:
- Exclusivity shifts power to the buyer: Once the LOI is signed, you can’t negotiate with other buyers for 45–90 days, putting you at a disadvantage.
- Unpreparedness leads to delays: Missing documents or disorganized records can make buyers lose confidence or renegotiate terms.
- SaaS and AI companies face extra scrutiny: Buyers focus on metrics like Monthly Recurring Revenue (MRR), churn rates, and compliance with data privacy laws.
To avoid this:
- Prepare financials early: Organize profit-and-loss statements, tax returns, and customer contracts before signing the LOI.
- Use tools to streamline due diligence: Virtual Data Rooms (VDRs), AI analytics, and compliance software can save time and ensure accuracy.
- Hire M&A experts: Specialized attorneys and advisors can help protect your interests and clarify deal terms.
The clock starts ticking once the LOI is signed. Being organized and proactive is the best way to protect your valuation and close the deal on favorable terms.
No deal gets better after the Letter of Intent (with Hutton Henry)
The #1 Mistake: Failing to Prepare for Due Diligence
One of the biggest missteps founders make after signing a Letter of Intent (LOI) is treating it as the final step of the deal instead of the start of a critical process. Due diligence is a deep dive where buyers meticulously verify your financials, legal compliance, and operational details to ensure everything checks out as promised [8]. What many founders don’t realize is that their strongest bargaining power is right before signing the LOI - not after [4][6].
Once the LOI is signed, the exclusivity clause comes into play, giving buyers the upper hand [1]. This shift in leverage means that any delays, missing documents, or inconsistencies uncovered during due diligence could lead to price renegotiations - or worse, the buyer walking away entirely. While over 90% of venture capital term sheets eventually close, M&A LOIs have a much lower success rate [5]. This imbalance often catches founders off guard, leaving them vulnerable to common pitfalls during the due diligence process.
"If you sign an LOI before assembling these documents and have to scramble to create them on the fly, those delays may cause the buyer to lose interest." – Carol Tice, Author, They Got Acquired [1]
Why Founders Skip Due Diligence Preparation
Many founders skip preparation because they see the LOI as psychologically binding, assuming the deal is already done [9]. After months of negotiations, it’s natural to want to celebrate and let your guard down. Some also place too much trust in verbal agreements, believing the buyer won’t change terms after agreeing on a price. Another common mistake is underestimating the level of scrutiny buyers apply. Founders often assume their existing financial reports and dashboards will suffice, not realizing buyers frequently bring in specialized accounting firms to challenge working capital calculations or revenue recognition practices - sometimes just days before closing [10].
The result? A phenomenon known as the "alligator roll", where the buyer drags out due diligence for months - sometimes over 180 days - wearing down the seller until they agree to a lower price just to finalize the deal [1].
How Poor Preparation Hurts SaaS and AI Companies
For SaaS and AI companies, the stakes are even higher. Buyers are laser-focused on recurring revenue metrics like Monthly Recurring Revenue (MRR), churn rates, Customer Acquisition Cost (CAC), and Lifetime Value (LTV) [8]. If your MRR includes one-time fees or you can’t produce detailed churn analysis by customer cohort, your valuation will come under scrutiny.
These delays can create “deal momentum,” where the fear of a deal falling apart pushes founders to accept unfavorable terms just to close [1][6]. On top of that, buyers will closely examine intellectual property rights, data privacy compliance (e.g., GDPR, CCPA), and the scalability of your technology stack [8]. If you can’t quickly demonstrate that your AI models don’t infringe on third-party intellectual property or that your data privacy practices meet regulatory standards, the buyer may lower their offer - or walk away entirely.
Why This Mistake Can Kill Your Deal
Deal Delays and Lost Momentum
Failing to organize your financials before signing an agreement can lead to weeks of scrambling - gathering profit-and-loss statements, tax returns, and customer contracts at the last minute. This kind of disarray can make buyers lose interest fast. If you can’t provide clear monthly recurring revenue (MRR) data or if your records are a mess, the timeline for closing the deal can stretch endlessly [8][3].
Meanwhile, the time spent on due diligence - up to 40–50 hours a week - while still managing the day-to-day operations of your business can take a toll. Revenue growth often slows, customer support suffers, and key metrics can decline [3][1]. What starts as a simple documentation issue can spiral into a broader performance problem, making buyers question the stability of your business. These delays don’t just stall progress - they also weaken your position in the market, opening the door to valuation cuts and operational risks.
Lower Valuations and Weaker Negotiating Position
Once you sign a letter of intent (LOI), your negotiating leverage takes a significant hit [5]. Before signing, you have options. Afterward, the 45–90 day exclusivity period hands most of the leverage to the buyer [1]. Buyers know this and often use it to their advantage.
Joe Hogg, Managing Director at Global Wired Advisors, describes a common tactic:
"We've seen LOIs where buyers ask for 180 days. This can create an 'alligator roll,' where you're out of the market for so long, the buyer thinks they can lower the purchase price. You're in a death grip" [1].
If buyers find that your reported MRR includes nonrecurring fees, they may push to lower the purchase price. With limited alternatives during an extended exclusivity period, sellers often feel forced to accept less favorable terms. Unlike venture capital term sheets, which close at the original terms over 90% of the time, M&A LOIs are far more likely to be renegotiated downward [5].
Legal and Operational Risks
Disorganization doesn’t just hurt your timeline and valuation - it can also create legal and operational headaches. Without proper preparation, you risk exposing sensitive customer information or proprietary technology during due diligence, which a buyer could later use against you [1][6]. This lack of clarity can lead to accusations of misrepresentation, a common issue in smaller deals under $1 million, where 25% to 33% of sales face such claims after closing [1].
Leaks about a potential sale can also cause disruptions. Employees may feel uneasy, suppliers might hesitate, and customers could lose confidence [4]. If the deal falls through, you could be left with a demoralized team, nervous clients, and a business struggling to regain momentum.
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How to Avoid This Mistake: A Practical Checklist
Due Diligence Preparation Checklist for Founders After Signing LOI
Once you've signed a Letter of Intent (LOI), the clock starts ticking. You typically have 30 to 60 days to complete due diligence before the buyer starts questioning your business - or worse, walks away entirely [11]. As Kison Patel, CEO of DealRoom, puts it:
"The due diligence process should only last between 30 and 60 days. This is achievable if delegated to an efficient, dynamic team... you want to close the deal as soon as possible, while also being thorough." [11]
To avoid unnecessary delays or complications, start preparing right away. Don’t wait for the buyer to make the first move. Use this checklist to stay on track and ensure your due diligence process is smooth and efficient.
Gather and Organize Financial Documents
Begin by compiling all critical financial records. This includes income statements (P&L), balance sheets, and cash flow statements for the past three to five years. Add monthly and quarterly financial updates to highlight recent trends and seasonal patterns [12][13].
If you're in SaaS or AI, go a step further. Prepare detailed reports on Monthly Recurring Revenue (MRR) and Annual Recurring Revenue (ARR). Analyze customer concentration - especially if a single client accounts for over 25–30% of your revenue. Include churn rates and deferred revenue breakdowns [11][12].
You'll also need federal, state, and local tax returns for the past three to five years. Provide proof of payroll, unemployment, and sales tax payments, as well as a comprehensive debt schedule listing loans, credit lines, and any off-balance-sheet obligations.
Store all these documents in a secure Virtual Data Room (VDR) such as DealRoom, Google Docs, or Dropbox. Double-check everything against source documents like bank statements and invoices to avoid discrepancies later [3][11][12].
Organize Contracts and Operational Records
Beyond financials, buyers will want to see how your business actually runs. This means sharing customer contracts, supplier agreements, employment records, and operational manuals [3][8]. Elliott Holland of Guardian Due Diligence emphasizes:
"Your ability to stay organized can be the difference between closing a deal or allowing that deal to blow up." [3]
Create a detailed operations manual that explains your business processes and revenue streams. Review HR records carefully, making sure roles are clearly defined - especially when distinguishing between independent contractors and full-time employees. This helps avoid potential liabilities. Delay sharing sensitive customer data until it's absolutely necessary. For SaaS businesses, confirm IP ownership and compile all software licenses to meet buyer expectations [1][3][14].
Review Legal Terms in Your LOI
Before diving into due diligence, revisit your LOI to ensure all key terms are clear. John O'Dore, CoFounder of Chinook Capital Advisors, notes:
"Negotiating terms in the LOI is often the only time the seller has leverage on key deal points." [15]
Pay close attention to binding clauses like exclusivity (usually 30 to 60 days), confidentiality, and any break-up fees [1][2][15]. Push for a shorter exclusivity period with clearly defined milestones for the buyer. Make sure "debt-free/cash-free" terms are explicitly outlined so there's no ambiguity about how company debt and excess cash will be handled [7][10].
If part of your payment involves an earn-out, set performance targets that are specific, measurable, and realistic. Remember, buyers may not prioritize hitting these targets post-acquisition [2][10]. Negotiate working capital based on a 6-to-12-month historical average to avoid unexpected price adjustments. You might also want to include a clause that terminates exclusivity if the buyer attempts a significant price reduction - say, more than 20% - after due diligence [1].
Finally, hire an attorney who specializes in M&A. General corporate lawyers may lack the expertise to navigate the nuances of these deals. An M&A expert can help protect your interests and ensure market terms are fair [4][7].
SaaS Tools to Simplify Due Diligence
Specialized software can be a game-changer when it comes to organizing data, automating reports, and building buyer trust. According to DNA Growth, nearly 60% of executives blame inadequate due diligence - especially the failure to uncover critical issues early - for deals falling apart [19]. Modern SaaS tools can help ensure you're not part of that statistic. Let’s explore some of the key platforms that can streamline every step of your due diligence process.
AI-Powered Analytics for MRR and Churn Data
If you want to sharpen your revenue insights, AI-driven analytics are the way to go. These platforms can identify revenue anomalies and predict churn, allowing you to act quickly during the exclusivity period. For instance, AI tools can flag misclassified one-time fees in Monthly Recurring Revenue (MRR) - a potential red flag that could lower your valuation [16][8].
Benchmarking tools take it further, letting you compare metrics like CAC, churn, and NRR against a database of over 1,000 companies [16]. This kind of validation can result in an average 40% improvement in key SaaS metrics within a year of acquisition [16]. Plus, these tools provide growth trajectory modeling and forward-looking projections, which can help you justify higher valuations based on future earnings rather than just historical data. As Jay Jung, Founder of Embarc Advisors, puts it:
"When I was in investment banking, we never valued a company off backward-looking numbers. It was always a forward multiple applied to forward earnings - don't shortchange yourself." [21]
CRM and Data Organization Platforms
One of the first steps in due diligence is reconciling your CRM, billing systems, and ledger to eliminate discrepancies. Data inconsistencies can signal operational risks that might scare off buyers [18]. Automated CRM tools ensure real-time collection and reporting of customer data, making the entire process more transparent and reliable.
Virtual Data Rooms (VDRs) take organization to the next level by centralizing all your documents and keeping them updated. A well-prepared VDR not only builds buyer confidence but also keeps the deal moving forward. Chris Roper, Managing Editor at Acquire.com, emphasizes:
"The time to populate your data room is now... Waiting until you reach due diligence will delay proceedings while you gather everything together and could discourage the buyer." [17]
When your operational data is in top shape, you can shift your focus to legal compliance with the help of specialized tools.
Legal and Compliance Software
Legal due diligence often trips up founders, but the right software can make it manageable. Tools that track IP assignment agreements, manage digital minute books, and ensure compliance with data privacy laws like GDPR and CCPA are essential [17][8]. Digital minute books, in particular, consolidate key legal documents - like charters and meeting minutes - so you can quickly respond to buyer requests.
Cap table management software is another must-have. It keeps your stock ledger up to date and documents equity grants, SAFEs, and convertible notes, preventing potential ownership disputes [17]. For SaaS companies, features like source code escrow management and IP ownership verification are equally crucial [20]. By identifying deal-breakers early, a solid legal infrastructure can save you an average of $47,000 in aborted due diligence costs [20].
Workflow and milestone tracking tools also play a key role, helping you stay on top of financial reviews, meetings, and vendor checks [20]. Chad Harding of PEAK Technology Partners sums it up perfectly:
"Due diligence is not a closing-stage formality. It is one of the most influential drivers of valuation, deal certainty, and overall transaction success." [18]
Conclusion: Prepare Now to Protect Your Deal
Once you sign a Letter of Intent (LOI), the clock starts ticking - and so does your risk. During the exclusivity period, your leverage diminishes significantly, giving buyers the upper hand [21]. If your records are disorganized, your revenue recognition unclear, or compliance incomplete, these issues can derail the deal or lead to a lower purchase price. Founders who scramble to pull together documents often face accusations of misrepresentation, particularly in smaller deals [1].
To avoid these pitfalls, act early and stay organized. Gather key documents like financial statements, cap tables, and contracts while you’re marketing your company - not after the LOI is signed. Use a secure virtual data room to store everything, adopt project management tools to track progress, and schedule weekly “go/no-go” meetings to evaluate whether the buyer is proceeding in good faith [3].
Protecting your valuation is equally critical. Due diligence is where buyers verify every assumption they’ve made about your business. Missing documents and delays can lead to deal fatigue, causing buyers to lose interest or question your company’s stability [1][8]. Carol Tice from They Got Acquired underscores this risk:
"If you sign an LOI before assembling these documents and have to scramble to create them on the fly, those delays may cause the buyer to lose interest" [1].
To stay ahead, take advantage of tools that simplify due diligence. AI-powered analytics, CRM platforms, and legal compliance software can help ensure your data is consistent, automate reporting, and boost buyer confidence. These tools not only save time but also protect your valuation by delivering accurate, defensible metrics. Remember, due diligence isn’t just a formality - it’s where deals can succeed or fall apart. Start preparing now, stay organized, and keep the momentum working in your favor.
FAQs
What key documents should founders prepare before signing a Letter of Intent (LOI)?
Before committing to a Letter of Intent (LOI), it’s crucial to assemble and organize the key documents buyers will need for the due diligence process. Here's what to have on hand:
- Financial records: Include audited or reviewed balance sheets, income statements, and cash flow statements from the latest fiscal year, along with any interim financial results if available.
- Tax filings: Provide federal and state tax returns covering the past three years.
- Cap table and agreements: Prepare a detailed capitalization table, stock option schedules, and any shareholder or voting agreements.
- Legal and corporate documents: Gather articles of incorporation, bylaws, amendments, and minutes from board meetings.
- Intellectual property records: Compile patents, trademarks, copyrights, domain registrations, and IP assignment agreements.
Storing these documents in a secure, well-organized location - such as a cloud-based folder with clearly labeled subfolders - can make the due diligence process smoother and more efficient. This level of preparation not only saves time but also signals professionalism and readiness, reducing the risk of delays or complications that could disrupt the deal.
What steps should SaaS and AI companies take to ensure smooth compliance during due diligence?
To navigate due diligence effectively, SaaS and AI companies should concentrate on three critical areas:
- Perform a thorough legal and intellectual property (IP) audit: Verify ownership of all intellectual property and carefully review assignment and licensing agreements to avoid potential disputes.
- Set up a secure and organized data room: Ensure all essential documents are complete, properly structured, and easy for stakeholders to access.
- Bring in experienced legal professionals or due diligence experts: Have them assess regulatory and contractual obligations to spot and address any risks early in the process.
Taking these steps not only simplifies the due diligence process but also helps establish confidence with prospective investors or buyers.
Why should founders work with M&A experts after signing a Letter of Intent (LOI)?
Engaging M&A experts right after signing a Letter of Intent (LOI) is a smart move to keep the deal on track and avoid unnecessary complications. These professionals bring the know-how to handle intricate paperwork, stick to tight deadlines, and steer clear of expensive missteps during the due diligence process.
Skipping professional guidance at this stage can leave founders vulnerable. It’s easy to lose negotiating power, which might result in less favorable terms - or worse, the deal falling apart entirely. M&A experts are also skilled at spotting and addressing potential issues early, safeguarding your company’s valuation and ensuring its operations remain intact during this pivotal phase.
