LOI vs APA

November 18, 2023

by a searcher in United States

I've tried to look for more concise opinions on this topic, but I'm looking at a deal where the broker says they don't do LOIs because they are non-binding and they only do APAs (Asset Purchase Agreement). Curious to know if anyone has experienced this because I've read about and heard the exact opposite. I really like the broker and trust his guidance. I'm just wondering who has run into this and how you all think about it. Thanks!

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Reply by a professional
from University of Denver in Denver, CO, USA

The reason for an LOI is for a buyer to have an exclusivity period so the buyer has an opportunity to perform due diligence (i.e., buyer spending time and money) without the seller shopping the deal to others. This exclusive due diligence period is important because the due diligence will help a buyer determine what reps and warranties, indemnification, and other appropriate provisions should be included in the Purchase Agreement. Unless it is a very small deal (under $1mm), I would avoid signing any APA without going through DD first. I've seen several brokers propose this and several buyers entertain it (against my recommendations) and each time the deal has died after due diligence. Maybe it is just a small data set that is skewing the results, but each time the business had a lot of skeletons in the closet and misrepresentations in the financials. If you do go straight to an APA, make sure it provides for all the conditions to closing that you need to perform due diligence and get out of the deal without losing any money (other than the time and expense of your due diligence).

Reply by an intermediary
from The University of Chicago in United States

Going straight to APA does save time if everything checks out. But do your homework upfront so you don't feel rushed. A deal is only good if it's a good fit for you - don't be afraid to walk if your diligence doesn't align with their terms.

Have they facilitated deals like this before successfully? An APA essentially cuts out the exploratory LOI phase, so make sure they and the sellers are comfortable operating that way. Will you have full access to financials and operational details to conduct thorough due diligence prior to APA negotiations? You'll need that information to feel confident in the numbers and business. Can you get any "outs" built into the APA if your diligence uncovers any red flags? For example, making the purchase contingent on you securing financing. Ask other buyers/advisors if they've worked with this broker and seller team in the past. Get a sense of how flexible they are if any issues arise.

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