Timing of Purchase Agreement, Exclusivity in Florida

October 21, 2022

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

Hello All,

I recently sent an LOI over to a broker for a deal I'm looking at ($2.3mm purchase price). The broker provided feedback (he hasn't yet shown the letter to the sellers). The letter as I drafted it included exclusivity for a 90 day period, and I would plan to first focus on getting SBA financing squared away, diligence, etc. before getting the lawyers involved on the purchase agreement.. He instead wants to have the LOI say that within some small period of time (10 days, for example), we would draft, negotiate, and sign a purchase agreement which would contain all my conditions. Under his construct, exclusivity wouldn't kick in until the purchase agreement was signed (and, presumably, some sort of deposit was paid). He claims this is typical for deals in Florida (citing some sort of boilerplate documents that tend to get used by the broker's association there). He also says the sellers would be highly unlikely to go for my structure instead.

I'm wondering how hard I should push back on this. I tend to not want to go down the broker's path, as it seems to front-load everyone's legal expense, plus it leaves me unprotected while running up a legal bill drafting and negotiating documents. Plus, if the deal falls apart, everyone's out more deal costs than I believe is necessary.

So question 1: Is my reaction reasonable? Question 2: Is there something unique about Florida (or, out of curiosity, any other states) that truly does make the broker's construct "standard"? Question 3: Is there a "third way" that might address their concerns (meaning taking the company off the market without a full agreement in place) without the downsides from my standpoint?

Reply by a searcher
from The University of Chicago in Chicago, IL, USA

This sounds like a single family real estate agreement. Any document you could get comfortable signing after 10 days would need to have so many outs and contingencies that it wouldn't actually give the seller any additional confidence of closing. I'd dig more to understand why they want this type of contract. Are they concerned about confidentiality? Worried you don't have the financing? Something else? You should also try to educate them about the standard process for buying a company. It takes time, but you'll have a much better time following best practices rather than trying to bend over backwards to accommodate an oddball deal timeline.

Reply by a searcher
from University of Waterloo in Toronto, ON, Canada

Seems like an unsophisticated broker, and may be easier to talk to the seller directly about the cadence you have in mind, and that your path will save everyone transaction costs longer term.

You can beef up your LOI to include any key SPA/APA terms that the seller would want alignment on upfront, if any (i.e. earnout, rollover, holdbacks, etc.). I imagine alignment on the financial terms matters more to the seller than the nits around R&Ws. Those "boilerplate" templates are usually really light compared to what you may be used to (3-4 pg documents vs. a true purchase agreement)

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