LOI -- Am I being too inflexible?

October 24, 2021

by a searcher from The University of Chicago - Booth School of Business in Chicago, IL, USA

Hello All,

I recently sent an LOI draft to a broker for a business I'm interested in. The response contained some things that, to me, feel like they introduce too much risk (as my busted deal costs would accrue with little protection) or are impractical but I wanted to make sure I'm not being oversensitive or out of touch with what's "market" currently. I know that ultimately it's my decision and up to my risk tolerances, but I am thinking about this more in the sense of whether I need to recalibrate my expectations. This is a small deal, incidentally (a little less than $1mm).

1) The response strips the exclusivity component I'd proposed, instead allowing the seller to accept "backup" offers until escrow closes (presumably at that point the deal is done). However, the seller can break off talks between us for any reason before the purchase agreement is signed.

2) No access to records, documents, or other due diligence items until after the purchase agreement is signed and a deposit is put into escrow (though I can get the deposit back if the results of the due diligence are not satisfactory). This basically puts my legal costs ahead of due diligence, in my view, and I thought that's not what is usually done.

3) Certain unspecified assets will not be part of the acquisition, and the list of what is and isn't included won't be made available until after the LOI is signed (and the LOI obviously has a purchase price on it). My original language basically said I'd be acquiring all the company's assets, so I'm not sure whether this exclusion concept introduces risk (for example, if they don't like the price, they could leave out some assets and I wouldn't be the wiser, while my original language said I'm acquiring all the assets that are part of/used by the business).

4) No mechanism to adjust the seller note (~10% of the purchase price) later in the event of misrepresentation or breaches by the seller (and no other mechanism either).

5) Only 30 days for due diligence/financing/etc.

Any thoughts appreciated.

Reply by a professional
from University of Minnesota in Minneapolis, MN, USA

I'm in agreement with the other posters that these requirements are not reasonable, however, rather than cutting bait immediately, it might be worth your time to spell out your concerns for broker/seller. It's possible broker/seller/seller's lawyer might be acting out of ignorance and extreme caution, and the underlying deal might still be ok in spite of this. Never underestimate the potential transactional ignorance of various advisors, especially in the Main Street space. Seller's obtuseness might be scaring off other buyers and might even help you get a good deal (although I'm being pretty optimistic here). On the other hand, this LOI might portend additional headaches if the deal were to move forward. Very hard to predict.

Anyway, I'm not sure what your potential deal pipeline looks like, but if you can spare the time, I would advocate for a polite refusal on the terms proposed, but also letting Seller's team know you are a serious buyer and happy to revisit the deal if they reconsider these items.

Hate to throw the (business) baby out with the (bad transaction advice) bathwater.

Tortured metaphor included at no extra cost!

Reply by a searcher
from University of Pennsylvania in Portland, OR, USA

I agree with others that you should RUN from this deal as quickly as possible, but I'm also a proponent of trying to find creative solutions. So, maybe propose that the Seller has an option to break the contract as they are asking for but they are on the hook for 50% of your DD costs if they do so. This would be hard to enforce but should at least give you an indication of the Seller's/broker's approach to fair dealing. I imagine they will say no, which just reinforces that you should walk away from this one.

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