Buying a business: 20 financial checks before signing the LOI (2026 guide)

Short answer. Before signing a letter of intent (LOI) to acquire a French SME, twenty financial checks should be completed. They cover the quality of earnings (adjusted EBITDA, recurring margin), the balance sheet structure (net debt, normalised working capital, off-balance-sheet commitments), commercial robustness (customer concentration, churn), latent tax and labour risks, and the items that turn an apparently reasonable headline price into an excessive valuation. This guide details the methodology, alert thresholds and trade-offs the buyer must settle before any binding commitment.

A letter of intent is not an innocuous document. Even when non-binding on price, it sets the deal ecosystem: indicative price, structure (shares vs. business assets), conditions precedent, exclusivity, scope of representations and warranties. Anything not framed before the LOI becomes very hard to claw back during full due diligence: the seller treats an announced price as a negotiated price.

The twenty checks below do not replace a full financial, tax and legal due diligence. They allow the buyer to determine within a few days, based on filed accounts, statutory tax returns and a few targeted exchanges with the seller, whether the indicative valuation holds — or whether to renegotiate, restructure the deal or walk away.

For a buyer, these checks answer three questions:

• Are the reported earnings recurring and reproducible?
• Does the balance sheet deliver a net debt, working capital and commitments compatible with the asking price?
• Are the latent risks quantifiable and covered by representations and warranties (R&W)?

Check 1. Adjusted EBITDA, not reported EBITDA#

The EBITDA shown in the information memorandum is rarely comparable to a buy-side EBITDA. It must be systematically adjusted to remove:

• owner's compensation above or below market;
• non-recurring items (asset disposals, severance, litigation, exceptional grants);
• personal expenses booked through the company;
• intra-group transactions that will not survive closing (above-market rent paid to a property-holding company of the seller, services billed by another company of the seller);
• accounting changes that distort year-on-year comparisons.

Typical EBITDA bridge:

Check 2. Gross margin by product, service and channel#

A stable consolidated gross margin can hide drift. Request:

• gross margin by product line over 36 months;
• gross margin by channel (direct B2B, distribution, marketplaces);
• gross margin on the top 10 customers.

A 200–300 bps erosion over 24 months on the main channel is a pricing-power red flag — often diluted in the consolidated average.

Check 3. Recurring revenue#

Distinguish recurring revenue (subscriptions, multi-year contracts, royalties) from transactional revenue. Recurring revenue justifies a higher multiple but must be documented: renewal rate, average contract length, churn rate, price-indexation clauses.

Check 4. Seasonality vs. normalised revenue#

Compare three full financial years monthly. A company concentrating 60% of revenue in Q4 exposes the buyer to a peak working-capital need that has to be financed. A smoothed revenue profile carries a different post-closing cash risk.

Check 5. Tax or regulatory windfall#

Identify any EBITDA boost from an expiring R&D tax credit (CIR), a fading exemption, an exceptional energy subsidy, or a non-reproducible price effect. Otherwise the buyer pays a multiple on earnings that will not be repeated in year one.

Check 6. Net debt: contractual definition#

The net debt definition used in the price formula must be precisely captured in the LOI. Always include:

• bank loans (current and non-current);
• finance leases (IFRS 16-equivalent treatment);
• shareholder loans, even if interest-free;
• tax and social security liabilities beyond normal course of business;
• declared but undistributed dividends;
• treasury gaps generated by prepaid customer invoices for undelivered services.

And deduct:

• available cash (free of pledges or escrow);
• liquid investments < 3 months.

Check 7. Normalised working capital vs. closing working capital#

Closing working capital must be close to a normalised level. Otherwise the seller delivers a fuller or emptier shell to suit themselves. Three steps:

1. compute monthly working capital over 24 months (in days of revenue);
2. determine a normalised level (smoothed average ex-peaks);
3. include in the LOI a completion accounts or locked box mechanism with a working capital adjustment.

Check 8. Inventory: valuation and obsolescence#

Check:

• the method (FIFO, weighted average) and its consistency;
• the impairment policy (automatic provision beyond X months without rotation?);
• slow-moving items (rotation > 12 months) — typically over-stated.

A 15% under-provision on a €2m inventory is a €300k latent loss.

Check 9. Fixed assets: real maintenance CAPEX vs. depreciation#

Examine the average age of productive assets and the level of maintenance CAPEX over five years. Book depreciation of €200k/year against actual CAPEX of €50k/year signals chronic under-investment: the target will require catch-up CAPEX funded by the buyer.

Check 10. Off-balance-sheet commitments#

The most expensive blind spot. Explicitly request:

• guarantees given and received;
• on-demand bonds;
• pension and end-of-service indemnity commitments;
• lease commitments (capitalised residual rents);
• shareholder agreement undertakings;
• earn-outs still owed on prior transactions.

Check 11. Customer concentration#

Measure:

• share of top 1, top 5, top 10 customers over 36 months;
• average tenure of top 10 customers;
• presence or absence of change-of-control clauses in customer contracts.

Above 30% of revenue from a single customer, the risk justifies a valuation discount or an earn-out tied to the customer's retention.

Check 12. Supplier concentration and tech dependency#

Mirror analysis: top 3 suppliers, dependency on a patent, a licence or a critical SaaS vendor. A core software licence held personally by the seller is a deal-breaker to settle before the LOI.

Check 13. Human capital: key people and retention#

Identify:

• key people (technical know-how, customer relationships, supplier access);
• age and tenure of top management;
• enforceable non-compete clauses on the seller and strategic employees;
• 24-month staff turnover.

Article L.1224-1 of the French Labour Code mandates the automatic transfer of employment contracts in case of business transfer. The buyer inherits accrued holiday liabilities, potential severance, and pending labour litigation.

Check 14. Operational and IT compliance#

The IT stack determines the buyer's day-one steering capacity:

• ERP / accounting software, automation level;
• existence of a reliable audit trail (PAF) — required by Article 286 of the French Tax Code (CGI) for VAT-eligible transactions;
• GDPR compliance (records, lawful bases, contractual notices);
• e-invoicing readiness (mandatory phased rollout 2026–2027).

Check 15. Past tax audits and open prescription periods#

Request:

• the last three tax and URSSAF audit reports;
• any tax rulings (rescrits);
• the list of fiscal years still open for reassessment.

Standard prescription is three years (Article L.169 of the French Tax Procedure Code), extended to six years for hidden activity or major filing failures. The R&W must cover at minimum all open fiscal years.

Check 16. Latent tax risks#

Five angles to review:

• VAT: deductibility, reverse charge, applicable rates, intra-EU operations (EMEBI);
• Corporate tax: tax consolidation, loss carry-forward (Article 209 CGI), transfer pricing;
• Local business tax (CFE/CVAE);
• Capital gains on prior asset disposals;
• Already imputed tax credits (CIR in particular) potentially open to challenge.

Check 17. Labour and employment risks#

List of pending litigation, URSSAF audits, potential reclassifications (sham self-employment). Latent labour exposure is one of the largest post-acquisition reassessment items.

Check 18. Commercial and IP litigation#

• customer or supplier disputes;
• trademark filings (INPI), domains, source-code ownership;
• compliance with sector-specific regulation (healthcare, construction, food);
• insurance: coverage levels, claims pending settlement.

Check 19. Multiple vs. free cash-flow consistency#

An EBITDA multiple is meaningful only when reconciled with free cash-flow generation:

$$ \text{FCF} = \text{Adjusted EBITDA} - \text{Maintenance CAPEX} - \Delta \text{WC} - \text{Cash taxes} $$

A €1m EBITDA with €300k CAPEX, €100k working capital build and €175k cash taxes yields €425k FCF. On that basis, paying 7× EBITDA is 16.5× FCF — a derailing level for most SMEs.

Check 20. Acquisition debt repayment capacity#

In a leveraged acquisition (see our LBO and bank financing 2026 guide), senior debt is repaid through dividend up-streaming from the target — therefore from distributable profit after corporate tax and the legal reserve constraint (Article L.232-12 of the French Commercial Code).

Typical lender ratios:

Most deals that go wrong for buyers do not fail because the seller lied. They fail because nobody completed the 20 checks before the LOI. A signed LOI anchors seller expectations: pulling back on price afterwards becomes a confrontational renegotiation. In 80% of cases, the twenty checks can be performed on documents the seller is willing to share pre-LOI: three years of tax returns, trial balance, shareholder loan ledger, top-10 customer contracts, litigation register.

Our conviction: a serious buyer must produce a contradictory adjusted EBITDA and a contradictory net debt before any number lands in the LOI. Without that, negotiation happens on the seller's turf.

The most underestimated risk is not latent tax — that gets covered by R&W — but operational dependency on the seller. In SMEs, the seller is often the main business introducer, the key supplier negotiator, the technical hub. Their unstructured exit triggers, in 12–18 months, gross margin erosion of 5–15 points in a meaningful share of cases. No R&W covers this erosion: it has to be addressed via a transition agreement (duration, compensation, KPIs) framed at LOI stage.

Three decisions to settle before signature:

1. Acquisition structure: shares (SARL, SAS) vs. business assets (fonds de commerce)? Share deals preserve contracts, fiscal history and liabilities; asset deals isolate prior liabilities but break tax loss carry-forward and certain intuitu personae contracts.
2. R&W scope: duration (typically 3–5 years), cap (often 20–30% of price), per-claim and aggregate basket, exclusions. These are LOI-stage decisions, not SPA-stage.
3. Conditions precedent: financing, regulatory approvals, key customer consent, confirmatory due diligence. The more explicit, the more leverage the buyer keeps.

• E-invoicing: mandatory reception for all VAT-registered businesses from September 2026. An unprepared target = IT CAPEX to fold into the plan.
• CSRD / VSME: for mid-caps or targets in a CSRD value chain, the absence of sustainability reporting can weigh on bank negotiations.
• 2026 Finance Law: monitor changes to tax consolidation rules and interest deductibility (Charasse amendment, Article 209-IX CGI) before any LBO design.
• B2B payment terms: enforcement penalties from the DGCCRF are rising; a target with chronic late-payment patterns generates accruable fines.

Should the LOI be binding or non-binding?#

The LOI is generally non-binding on price but binding on certain clauses: exclusivity, confidentiality, information sharing, break fees in case of bad-faith withdrawal. Specify explicitly which provisions bind the parties — French case law sanctions abrupt termination of advanced negotiations.

Reported or adjusted EBITDA in the LOI?#

Always adjusted. The multiple cannot be discussed in a vacuum: it applies to a contradictory adjusted EBITDA. Otherwise the buyer pays for earnings they will never see again.

How long does the 20-check review take?#

Typically ten to twenty business days based on tax returns, trial balances, customer contracts, litigation registers. The timeline depends on the seller's cooperation and information quality.

Representations & warranties: which key parameters?#

Duration (3–5 years, longer for tax matters), cap (20–30% of price, sometimes higher for open fiscal years), per-claim and aggregate baskets, de minimis threshold, exclusions, escrow or bank guarantee mechanisms.

LOI then full DD, or full DD then LOI?#

The standard sequence is: short pre-DD (the 20 checks), conditional LOI, full DD during exclusivity, SPA. Inverting tends to lose exclusivity or generate uncosted spend.

The twenty checks above do not guarantee a good deal. They eliminate the bad ones and give the buyer the shared language to negotiate as an equal with the seller and their advisors. A well-drafted LOI is the output of this pre-due diligence: it locks the price, R&W scope and timetable on verified data — not on the information memorandum.

Last updated: 28 April 2026.