Brokers only wanting Purchase Agreements
September 17, 2024
by a searcher from University of Pennsylvania - The Wharton School in Tampa, FL, USA
I’ve had numerous brokers scoff at my LOI and my ask for exclusivity. I explained the need and how I can’t sign a binding commitment when I haven’t done any due diligence, let alone secure my SBA funding. Is it not common place in deals for exclusivity as long as both parties are operating in good faith to get the deal done? They push for a Purchase Agreement and say it can have clauses for me to get out of it, but isn't that non-binding then? What is the difference between that and an LOI besides overcomplicating things and forcing the PA to be done earlier and not as fulsome as we do not know all the facts? I get they want to drive a quick sale but how do you suggest I deal with this when they push back heavily on a good deal I’d like to do?
ChatGPT gave a nice response if any of those that are arguing "PAs only", would love to hear your thoughts on the following:
"While I understand the desire to move directly to a Purchase Agreement (PA) to expedite the process, skipping the Letter of Intent (LOI) stage can introduce several risks:
Clarifying Deal Terms: The LOI allows both parties to agree on key terms upfront without committing to them legally. This avoids surprises later on, as we can refine the details during due diligence. Without an LOI, there’s a risk of misalignment on critical deal points.
Negotiation Flexibility: An LOI provides a framework for further negotiation while keeping the deal non-binding. Jumping straight to a PA locks us into terms too early and could cause complications or delays if changes are needed after further investigation.
Time for Due Diligence: The LOI stage sets clear expectations about timelines for due diligence and exclusivity, ensuring that both parties are comfortable before signing the final binding agreement. Rushing into a PA could pressure us to make decisions without adequate time for thorough evaluation.
The LOI serves as a roadmap and helps streamline the process to avoid costly legal renegotiations later. I prefer to ensure all major points are ironed out upfront before moving to the legally binding PA."
in Stuart, FL, USA
This is why they try to get you to write up a purchase agreement and lock you into the deal, so you can both move forward with the due diligence process at that time. You may go through the due diligence process and find something you don't like. If so, you can get out of the deal for any reason that you want and get your earnest money deposit back.
There's no doubt that this is counterintuitive to how you think a deal should go but it is actually a faster way to get the deal moving along on both sides. If you like the deal based on what you have seen so far, make an offer on it or just give them the full price that they're asking. It really doesn't matter if you want to take the deal off the street because it is during the due diligence process that adjustments can be made if you see something you don’t like.
You can always go back and lower the price to what you feel is more accurate at that time. The seller will either acquiesce and agree to the lower price or he will tell you no, and you will go on to the next deal and he will be stuck holding a business that is probably priced too high.
Ask yourself this question; how many times have you heard of someone working on due diligence items only to find out someone comes along and takes the deal out from underneath them because they never locked it up? The reason that happened is because they did things backwards. On smaller deals, (under 5mm) it's not complicated, 1-Find a business you like 2-lock it up with a purchase agreement 3-enter into due diligence 4-renegotiate the sales price if need be or walk away from the deal and go on to a different one.
from University of Western Ontario in Toronto, ON, Canada
Asking for exclusivity should be received as a completely fair and reasonable ask. You will be spending a lot of time, energy, resources ($$$) on DD and getting this deal done, the least they can do is provide you with an exclusive period of time (even if it's only###-###-#### days).