LOI vs APA

March 26, 2024

by a searcher from Southern Methodist University in Dallas, TX, USA

I'm looking at a business in Florida and the broker has pushed for using an Asset Purchase Agreement rather than a Letter of Intent. Are there any key differences to be aware of? Is an APA more advantageous to a seller?

1 Like

15 Replies

183 Views

Replies

Reply by a professional
from University of Miami in New York, NY, USA

I think Bob Champoux (above) stated it best so far. From a transactional attorney of 20 years (and this is not legal advice):

(1) a deal starts with a buyer issuing a Letter of Intent (LOI). The LOI is, most often, non-binding except for certain provisions, which you should have reviewed by *competent* counsel.

(2) Once the LOI is accepted *and countersigned* by the seller/counterparties, then you have the lawyers work on a conforming Asset Purchase Agreement (or Stock Purchase/Equity Purchase - legal advice needed here on benefits of either), which is due and to be executed in accordance with the requirements of the LOI.

(3) Given that many deals are relatively complex, and that not every idiosyncrasy gets managed in an LOI, the APA is necessary to come to a meeting of the minds on all issues, from financing, inventory, due diligence, cancellation rights, deposit, price, closing, etc.

In short, the APA and an LOI are *not* synonymous - they are consecutive steps of an acquisition process.

Happy to help - let me know. redacted and###-###-####

Reply by an intermediary
from Southern Methodist University in Fort Lauderdale, FL, USA

Hi Grayson, fellow SMU Grad here. The short answer is, it's hard to say how different these two documents are without seeing them. The longer answer is, I've seen brokers push APA's because 1) they are more advantageous to the seller in the form of a) Reps and Warranties proposed, and b) requiring a deposit and two-step close as opposed to a simultaneous close. However, problem for the buyer is because they haven't done full diligence and businesses (especially smaller ones) often have issues with financials and how they are presented, they are often reluctant to go straight to contract, unless there are numerous "outs." I.E. the ability to cancel. That being said, if this contract has so many outs, then what's the point (meaning, why not just use an LOI with exclusivity)? If it doesn't have outs, then buyer beware. There's a reason that simultaneous close is the more popular method. Of course there are exceptions to every rule. Hope this helps!

+13 more replies.

Join the discussion