Operating the Business Between LOI and Closing
Signing the Letter of Intent represents a significant transition in the sale process. The buyer receives exclusivity, but the seller still owns the business. During this period, the seller must continue operating the company while the parties complete due diligence and negotiate definitive agreements. For that reason, LOIs often require the seller to operate within the ordinary course of business. The purchase agreement will typically address these obligations in greater detail.
What Does Ordinary Course Mean?
The ordinary course of business generally means operating consistently with the company’s established practices. Management should continue serving customers, paying vendors, managing employees, and making routine operating decisions. The objective is not to prevent management from running the business. Rather, the provision protects the company underlying the buyer’s offer. The buyer expects substantially the same business at closing that existed when the parties signed the LOI.
Decisions That May Require Additional Attention
Certain actions may change the company’s financial condition, operations, or future earnings. Therefore, sellers should carefully evaluate significant decisions during the period before closing. Depending on the transaction, these actions may include:
- Making significant capital expenditures
- Increasing owner or employee compensation
- Hiring or terminating key employees
- Entering significant customer or vendor contracts
- Discontinuing products or service lines
- Changing accounting policies or practices
- Incurring additional indebtedness
- Selling significant operating assets
- Making unusual distributions to owners
- Changing pricing or customer credit policies
During this interval, sellers should communicate unusual decisions to their M&A and legal advisors before taking action.
Protecting the Transaction Economics
Ordinary course operations may also affect the balance sheet delivered at closing. Working capital provides a common example. The parties may establish a normalized working capital target during negotiations. Changes in receivables, inventory, payables, or accrued expenses may affect the closing adjustment. Against this standard, sellers should avoid manipulating working capital to increase cash distributions before closing. Buyers will examine whether the company maintained normal operating practices. The same principle applies to earnings. Delaying necessary expenses or accelerating revenue may create diligence concerns and undermine buyer confidence.
Managing the Period Before Closing
Operating within the ordinary course of business does not require freezing the company. Businesses must continue making decisions and responding to changing conditions. Instead, sellers should maintain consistency and communicate material deviations before acting.
An experienced M&A advisor will coordinate these issues with transaction counsel and the seller’s accounting professionals. This coordination helps protect the negotiated economics and reduces unnecessary closing disputes.
