M&A Monday: The Danger of the Second Position LOI

In the past two weeks, I had 2 clients ask to submit LOIs “in the second position” and one seller who asked me why a seller has gone mysteriously unresponsive.

Let’s discuss the second position LOI, its impact on a deal, and how a buyer can prevent it.

The "Second Position LOI" is when a seller accepts an LOI and enters exclusivity with a buyer, but then another buyer submits an LOI and seller’s broker holds it in the second position in case the first doesn’t work out.

This is like getting engaged, but keeping another partner on speed dial in case things fall through.

The obvious problem is that receiving a better offer will impact the seller’s desire to close the initial deal, the seller may drag their feet until exclusivity period ends, or attempt to retrade the LOI with the first buyer.

Thus, the buyer is expending time and expense (often over $50k), while unbeknownst to buyer, the seller has their eye on a new suiter. I recognize that some seller brokers take the LOI and don’t tell the seller about it and most believe it is advantageous to seller in case buyer falls through.

When representing buyers, I almost always include binding language in my LOI’s Exclusivity section to prevent this: (1) the public listing will be removed, (2) no solicitation of new offers will be made, and (3) any offers received will be disclosed to buyer (sample paragraph for your LOI at end).

Sadly, for my client, after he spent money on QoE, legal, lender, and got ready to relocate his family, the seller received a better LOI in “second position” and became unresponsive.

Below is a sample paragraph that I include in my LOIs:

Seller will not, directly or indirectly, and will cause its affiliates and its and their respective directors, officers, employees, members, managers, agents, advisors and representatives not to, (i) solicit or encourage any inquiries, discussions or proposals regarding, (ii) continue, propose or enter into negotiations or discussions with respect to, (iii) provide non-public information relating to or in connection with, or (iv) authorize, recommend, propose or enter into any confidentiality agreement, term sheet, letter of intent, purchase agreement or other agreement, arrangement or understanding regarding an acquisition of all or part of, an investment in, or a business combination or consolidation with, or the formation of a partnership or joint venture with, the Business, in each case other than involving only [Buyer] or any of its affiliates (collectively, “Exclusivity”). Until the Termination Date, Seller and Seller’s representatives agree to inform Buyer promptly of any inquiry, discussion or proposal from any person or entity of the type referred to above, including the terms thereof and will not accept or review any other offers, letters of intents, or other proposals of any kind.