Deposit with an LOI
June 22, 2022
by a searcher in Boston, MA, USA
What's everyone doing with deposits and LOI and how are you covering your ass if you put one down? Currently have LOI out, w/o deposit, edits came back w/ a 5% deposit which is short money in the grand scheme of things. But they want it to be non refundable after 60 days. Their thought was we should have a signed APA at 60 days, and I've only ever signed an APA at close w/ funding.
This is a service businsess w/ PM contracts in place, ~8 employees (3 of whom are key)., backlogged revenues, ect. So not a super straight forward deal and I anticipate schedules being a bit more complex than "N/A" for 90% of them.
For refence, about $1M transaction value.... 5% is short money, but the concern between the gap of the 60 days post LOI and close leaves a lot of questions..
from Wake Forest University in Winston-Salem, NC, USA
As for EMD: Once in the seller's shoes, it makes sense (See related post: https://www.searchfunder.com/post/earnest-money-deposit). Even when representing buyers, we recommend their offer includes an EMD (with the right protections -- refundable during a set period, placed in a trust account, etc.). EMDs starts to taper off above $2mm in EBITDA. and as mentioned in other posts, the correlation between a buyer that puts in an EMD and actually closes is quite high, and it does help the seller separate buyers when several are interested. Buyer type and experience is also a factor. A PE firm or strategic coming in as a buyer with a portfolio of companies, track record, and balance sheet is very different (and would not be expected to put in an EMD) from an individual (whether structured as an LLC or not) with zero to a few deals under their belt and a limited balance sheet. Different risk profiles.
As for a simultaneous sign and close (aka signing an APA at close), this is a very seller-unfriendly and very risky for the seller practice -- imagine all the things that have to happen prior to closing, changes put in place, bells that can't be unrung, all based on the intent, but not obligation to close. Leaving until the day of closing for the seller to be sure that they have an agreement to sell. That's not to say that there shouldn't be conditions to closing in an APA that protect the buyer from material adverse changes, failures of reps and warrants, etc. prior to closing. And if an SBA loan is being used, simultaneous sign and close is an unworkable process (they need a signed APA in order to proceed with and complete their underwriting).
from University of Pennsylvania in Charlotte, NC, USA
Which leads to a related question for the community - is so little due diligence being done - both ways - before agreeing to an LOI that seller doesn't trust that buyer genuinely intends to close and buyer has insufficient knowledge about the target to be highly confident of achieving closing (on the LOI terms)? In larger deals it's expected that significant due diligence will be done pre LOI (not just reading a CIM) and buyer and seller will have spent time together in a structured setting addressing informational points. It's an investment on both sides and increases likelihood of closing - no deposit needed. Appreciate any feedback on this.