Letter of Intent Without Exclusivity
April 14, 2023
by a searcher from Texas A&M University in Dallas, TX, USA
The context: I'm an intermediary. We've noticed a trend recently of buyers for smaller transactions submitting LOI's very quickly - review the CIM and within one day an LOI is submitted. We don't work this way for two reasons: 1) we don't hold back diligence materials pre-LOI and we expect a buyer to ask for additional information and do pre-LOI diligence, 2) we expect a deal to close when we execute the LOI, so we want to know the buyer has done their diligence.
I have a hunch that buyers are getting this advice from others who say "Just get a bunch of LOIs out there" combined with their experience with bad business brokers who won't provide any diligence materials until they have an LOI in place.
I'm wondering if I'm swimming upstream by trying to force buyers to follow our process? The tension being that I don't want to lock a seller into 90 days of exclusivity for a buyer that may be on the fence, but I also want to give the buyer some comfort that their offer will be accepted.
So, what if we proposed an exclusivity clause that allowed the seller to stay in market even while under contract?
Here are the terms of my proposed clause:
- We're allowed to continue to market the deal and talk with buyers
- The buyer is allowed to terminate the LOI
- We're NOT allowed to terminate the LOI unless mutually agreed with the buyer
- We're NOT allowed to accept another proposal
What say you, Searchfunders? Would you accept these terms? I want to give buyers comfort that we won't rug pull them without locking up a seller unnecessarily.
from Boston College in Boston, MA, USA
I could be a little jaded because I missed out on the "golden egg" home caregiving opportunity because someone beat me to an LOI by one day, but I did do comprehensive pre-dd.
from University of Tennessee in Nashville, TN, USA
Please note the use of the word 'should' in the above paragraph. Very rarely do all parties do what they should. Before the acceptance of any document, binding or non-binding, all parties should understand that they have made an informed decision with all available information.
As a Searcher, and formerly a Director of Corporate Development, I would not enter into any LOI with a Seller that didn't provide an exclusivity period. That's the time when DD is conducted, purchase agreements are drafted and negotiated, financing is secured, and transition/integration plans are formulated and finalized. When I was corporate, we knew we could close before submitting the LOI. Now my job as a Searcher is to know I can close before submitting the LOI.
On the flip side, the Advisor/Broker or Seller has the responsibility to qualify the Buyer prior to agreeing to an LOI. Why would a Buyer risk tens of thousands of dollars in transaction-related expenses when the Seller isn't committed? What reliance of trust can be fostered between parties when one is committed and the other is not? That's akin to accepting a marriage proposal only to have one party continue to date other people to hedge their bet.
Different advisors/brokers have their own policies regarding exclusivity periods and my opinion on the matter may or may not be widely shared. In different circumstances, different policies are necessary. Asking a Buyer to accept a LOI without a firm exclusivity period is a non-starter in my view.