Reggie (not his real name) may not have felt so bad, but I sure did. In late 2018, he retained me to sell his company. We identified several private equity (PE) firms that had made recent investments in Reggie’s industry, and within a couple of months, we started to receive offers. Reggie signed a Letter of Intent with a PE firm in northern Ohio, and we immediately started the due diligence process expecting the close to be within 90 days.

This PE group had the usual coterie of freshly minted MBA asking tons of questions, with data requests that seemed to never end. Bank records, HR files, customer orders, raw material invoices, and on and on. Reggie was trying to keep his staff from knowing he was selling the company so he did most of the data gathering himself. This meant he spent less time managing his business, and everyone around him could see he was distracted by something.

About four weeks into the data-gathering phase, a group of accountants from a third-party firm arrived to do the quality of earnings report. At this point, Reggie had to bring his accounting firm and in-house controller into the loop. Fortunately, the meetings were held at the office of the accounting firm, so Reggie’s other staff wouldn’t get even more suspicious. Once the quality of earnings team left, things went silent. We didn’t hear from the buyer for about a week. I finally called them and got the “we’re really busy, we’ll be back with you soon” kind of answer, but it didn’t take a rocket scientist to figure out that getting Reggie’s deal done wasn’t their highest priority.

After another few days of silence, I called the PE firm again and they told me they had decided to pass on the acquisition of Reggie’s company. They said they had discovered in due diligence that his customer base was too concentrated around one industry, and given recent disruption in that industry, they felt Reggie’s revenue might soon be impacted. They also told me Reggie’s desire to leave soon after the deal was done made them nervous. But after a few minutes of small talk, I realized there was a whole unrelated reason they had decided to pass on Reggie’s deal. They started to tell me how busy they had been on an acquisition in a totally different industry. Though they never came right out and said it, I figured out what had happened. It was a combination of things, including getting slightly nervous about Reggie’s deal while getting more excited about another deal. In a world of limited resources (time and money), they decided to follow a different path.

I had to break the news to Reggie, and he was remarkably calm and understanding. When I told him that about two-thirds of all LOIs never get to closing that seemed to give him the perspective he needed. After all, Reggie was a longtime baseball fan where a one-third success rate is something to be proud of.

Having been involved in scores of deals involving hundreds of millions of dollars, I’ve seen many LOIs signed but never completed. That’s why I tell my clients that LOI does not mean “letter of intent to buy” but instead “letter of intent to take a hard look.” The only substantive effect of an LOI is the buyer has an exclusive window to dig deeper into the company. Signing an LOI doesn’t start the clock ticking toward a closing, it only starts the process for the potential buyer to take a closer look. The LOI is not the end of the selling process, it’s not even part of the way through the selling process. The LOI is only the beginning, and once it is signed, the real selling starts.

JIM CUMBEE is President of Tennessee Valley Group, Inc. a retainer-based business brokerage and transition mediation firm in Franklin, TN. Cumbee is an attorney and has an MBA from Harvard Business School. Jim is the author of Home Run, A Pro’s Guide to Selling a Business.  He has a wide range of corporate and entrepreneurial experiences that make him one of the most sought-after business transition advisors in the state of Tennessee. The principles above are true, but the story, names and fact patterns are changed to preserve the parties’ identities.