Broker's own 'LOI Template', and 'Good Faith Deposits'

searcher profile

May 09, 2024

by a searcher from University of Virginia-Darden - Darden School of Business in Philadelphia, PA, USA

Hi all! I'm moving toward submitting an LOI on a unique and small, but profitable, retail store in my city. The seller is working with a national-affiliated broker group. The broker wants to use their 'business offer' template rather than an LOI that I would draft (probably assuming that I don't know anything about anything). I got a copy of their template, and here are the things that stand out to me. Would love this communities feedback on this, and how to negotiate with this broker to submit my own LOI.

- Whereas other LOI drafts are written to be non-binding except for confidentiality, etc, this is written like a purchase agreement. It says 'seller agrees to sell to purchaser at $x price' and that the purchaser must cancel agreement in writing 'no later than last day of review period' (which is only 10 days). AND if 'notice is not timely' then 'this agreement shall continue to be binding upon seller and purchaser.' This just seems wild to me.

- Asks for a good faith deposit into the broker's escrow account, another deposit two days after 'execution of this agreement' (so after completion of due diligence?), and THEN the closing payment (I do not want to do either of those pre-payments). Also, if seller backs out during due diligence, I only get HALF of my escrow payments back (also wild to me). If I back out of deal, half of my deposits go to seller and half to broker (WHAT)

- A paragraph saying that if buyer and seller end up in court, we have to cover the broker's legal fees (split)

- No discussion of working capital

- No section on at-will continued employment of employees

- Nothing about conditionality of deal based on verifying the reported revenue and EBITDA

- A huge section where its my responsibility to prove I've assumed the lease before closing

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commentor profile
Reply by a professional
from University of Notre Dame in New York, NY, USA
This all seems extremely off-market from the sell-side. LOI’s need to be non-binding (except for certain provisions as you noted). A good faith deposit is common (usually around 5%), but two deposits is excessive (unless it’s 2% and 2% or something similar, but that seems inefficient). You should also get your entire deposit back unless you breach a closing condition in the purchase agreement (i.e., cant obtain financing, etc.).

As for your other points:

Legal fees – most typical format is that all legal fees are borne by whatever party loses in court

Working Capital – you don’t have to negotiate the entire adjustment mechanism in the LOI, but you can say “Purchase Agreement is expected to include a working capital adjustment for similar deals in size and structure.”

Employees – you can say closing would be contingent on employment contracts continuing post-close (if it’s a stock sale, they’d automatically continue// if asset sale they’d need to enter into new agreements)

Purchase Price – LOIs will typically say that the Purchase Price offered is contingent upon "x,y,z" – this is where you can flag that price offered in the LOI is contingent upon verifying reported revenue and EBITDA.

Hope this helps – happy to chat through more if needed. Feel free to DM me or email me redacted
commentor profile
Reply by a searcher
from California State Polytechnic University in San Diego, CA, USA
Pass, don't let broker bully you into using their very seller biased pretty much purchase agree t loi. Use a traditional loi template, non binding, exclusive period, no deposit. Here's what I'm offering, at this price, if what you stated is true, with these terms. It's on the seller to accept if they believe you're able to deliver. A support letter like live oak does is helpful, saying things like my attorney will draft the LOI for me also helps shut them down. Even if you are inexperienced, they don't need to know that. Get a few failed LOIs under your belt and it make it much faster. Most experienced searchers are looking for reasons to say no to a deal and move on, they're giving you a few reasons. Don't cave!
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