LOI Underwriting / Due Diligence

Based on the most helpful WSO content, the level of effort and detail put into underwriting before submitting a Letter of Intent (LOI) can vary significantly depending on the firm's philosophy, deal type, and available resources. Here's a breakdown of the general approach:

1. Pre-LOI Underwriting Effort:

   • Many firms aim to conduct as detailed an underwriting process as possible with the limited information available before submitting an LOI. This includes:
     • Reviewing all available materials (e.g., offering memorandum, financials, rent rolls).
     • Conducting property tours and identifying potential capex needs.
     • Engaging in preliminary discussions with contractors or other experts for rough estimates on significant items.
   • The goal is to minimize the risk of retrading (renegotiating terms) later in the process, which aligns with your manager's philosophy. This approach is particularly appreciated by sellers and brokers as it demonstrates seriousness and reliability.

2. Post-LOI Due Diligence:

   • Once exclusivity is secured through the LOI, the due diligence process becomes far more detailed and resource-intensive. This typically involves:
     • Hiring third-party consultants for specialized diligence (e.g., environmental, legal, tax, IT, insurance, etc.).
     • Conducting a deep dive into financials, operational data, and other critical areas.
     • Negotiating purchase agreements and addressing any findings that could impact pricing or terms.

3. Standard Practices:

   • Your firm's approach of conducting nearly as detailed underwriting as possible pre-LOI is not uncommon, especially among firms that prioritize maintaining strong relationships with brokers and sellers.
   • However, some firms may take a less rigorous approach pre-LOI, relying on the post-LOI diligence phase to uncover and address potential issues. This can sometimes lead to retrading, which is less favorable from a relationship standpoint.

4. Philosophical Differences:

   • Firms like yours, which emphasize thorough pre-LOI underwriting, often do so to build credibility and avoid surprises later in the process.
   • Other firms may prioritize speed and flexibility, accepting the risk of retrading if significant issues arise during post-LOI diligence.

In summary, your firm's approach of detailed pre-LOI underwriting is a best practice for maintaining credibility and minimizing retrading, though it may require more upfront effort. This philosophy is particularly valued in competitive markets where reputation matters.

Sources: Overview of Sell-Side M&A, Overview of Sell-Side M&A, Life in Acquisitions (Analyst/Associate), Advice for New Analysts Seeking PE Exits