LoI's - Binding? Non-binding?

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March 01, 2018

by an investor from University of California, Berkeley - Haas School of Business in Moorestown, NJ 08057, USA

I'm running my search a bit differently than most and leveraging brokers probably more heavily than others are, as I do not have full-time to devote to beating the bushes and I'm constraining my geographic area, so I'm working with brokers that specialize in my local area.

Brokers seem to want LoI's to be binding, but my attorney and others say that there is no need for a LoI to be binding. Would like some opinions from you all who have a lot of experience in this area.

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Reply by a searcher
from University of New Hampshire in 101 Rocky Pond Rd, Hollis, NH 03049, USA
Jim- binding LOI's and non-refundable deposits sounds like a very unsophisticated seller and an unreputable broker. And I agree with Bakari some language like exclusivity and non-disclosure terms should be binding for both sides.

As for Ted's comment that you need an attorney to draft non-binding LOI's I totally disagree. Remember the whole idea with deal flow is getting targets to talk, provide you with some initial information, give them an idea of what you would pay for it and then grind on the diligence to see if the value is there. Spending a lot of time and money with attorney's on non-binding LOI's is a waste of both that time and that money. This was my approach when I did M&A in big corporate land (not involve counsel in the LOI process outside of binding boilerplate language) and in my search.

LOI's don't blow up deals - the inability to be real, upfront, honest, communicate and manage expectations blows up deals.
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Reply by a searcher
from Harvard University in Chicago, IL, USA
@Jim I have only ever heard of a $10K "earnest money" clause (in concept it works just like it does when buying a house), which would be credited to you upon closing. I have only ever heard of refundable earnest money clauses. Some brokers will ask for them and some may even demand them. In my opinion they are not standard practice, however they are more common in transactions below $1million. At that transaction size, most business brokers are used to dealing with many, many unsophisticated potential buyers. If you can convince the broker that you A) are emotionally "ready" to buy a business, B) have the resources to close a deal, and C) know how the whole process works, then you should be able to overcome the request for an earnest money clause. Under no circumstance would I ever agree to a "non-refundable deposit".
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