Broker wants me to sign a binding APA within 5 days of signing an LOI?

October 27, 2023

by a searcher from University of Southern California in Portland, OR, USA

I recently submitted an pre-LOI offer. The broker came back and said they're making a final decision tomorrow and wants an LOI. I'm fine with that, however, the broker mentioned the next step would be signing their redacted formal APA within 5 days that would be legally binding. The LOI template the lender provided has similar language:

"Asset Purchase Agreement ("APA"): Prior to expiration of this LOI (5 days) and prior to Closing, Buyer and Seller will execute a binding APA based on the terms of this LOI and additional terms and conditions acceptable to both parties. The APA will include customary terms, such as representations, warranties and indemnities and be prepared using:"

Is this a typical progression? This is my first acquisition, but my understanding is that LOIs generally cover the due diligence period. Upon completion of diligence, the buyer's lawyer draws up an APA and both parties sign it at closing.

Reply by an intermediary
in Campbell, CA, USA

It depends on the size and complexity of the business.

For businesses under $5MM in revenue (Main Street), deals are done without an LOI; they are done with an APA or SPA with an earnest money deposit and contingencies on due diligence, the lease, and financing. Buyer and seller agree to the length of time for each of these contingencies. If the buyer doesn't like what he/she sees in any of these steps, they get their money back and everyone goes their separate ways. The broker doesn't get paid unless escrow closes.

In the sale of businesses with revenue of $5MM-$50MM (Lower Middle Market), LOIs are the norm. Due diligence is more complex and performed by a team of CPAs, attorneys, etc., usually at considerable cost to the buyer and can take up to 60 days. Once due diligence is completed to the satisfaction of the buyer, it is time to enter into a binding APA or SPA.

If any of you are interested in learning more about "the norm" for business intermediaries in CA, across the US, and internationally, you should check out CABB.org, IBBA.org, and MASource.org.

Reply by a searcher
in New York, NY, USA

It's not normal, but I have had some folks request this. Every time, I had a conversation with the broker and was quite clear: we follow the same standard process: IOI, LOI, then APA. We don't skip a step because this is the process we believe maximizes the chance that a transaction we agree to do actually gets done. Some brokers will say "Well this is the way we do things" and if that's the case I move on. Plenty of deals to look at where you won't run the risk of being tied up in court forever. The average time to close is 3-4 months according to the SIG study. That's a lot of diligence you'll need to do before signing and five days is simply impossible. And that's ignoring the legal implications and how badly you box yourself in. If the broker is unreasonable at the beginning of the process, they will be unreasonable in the middle and the end. Best to partner with someone who isn't trying to take advantage of you instead.

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