Moving straight to APA, sans LOI?

October 30, 2020

by a searcher from University of California, Berkeley - Haas School of Business in Oakland, CA, USA

Hi all,

I'm looking at a business that I really like. The owners and I have built a great rapport, and this is a company I could see myself taking over and running well. This is a brokered deal, and the broker is insisting on a few things:

A) Instead of me issuing an LOI, he'd like go straight to a template APA that he has prepared. It's a fairly restrictive document that (in my opinion) binds the seller and I too closely together at this point in the process
B) Along with the APA, he'd like a 'good faith deposit' to be put into escrow. The APA outlines scenarios where I'd get my money back if the deal broke off, but also other scenarios where I wouldn't

Having read through the document, I don't think there's anyway I could seriously sign this. My questions are:

1) Has anyone come across something like this (e.g., move straight to APA, and one that is fairly restrictive)?
2) I'd like to think that my willingness to invest in attorneys and accountants is enough of a signal of good faith, so putting some money in escrow seems pretty silly to me. My understanding is that usually escrow, if it's used at all, is for the SELLER to put cash into an account for the BUYER to draw from in case something happens. Are there other cases when cash is put into escrow?

On the one hand, I really like the sellers and the business, so I'd be more willing to flex here than a typical deal. On the other hand, this APA is throwing up a ton of broker red flags for me, so part of me wants to walk away unless the broker lets us go through a standard LOI -> APA process. Thoughts?

Reply by an investor
from University of Virginia in Tampa, FL, USA

Unfortunately, it's common in small, main street deals. Especially here in FL. And convincing a broker/seller to do otherwise (LOI then APA) is an uphill battle because they never want to take the deal off the market with no buyer recourse/skin in the game. I used to fight this hard, now I play the game a bit more, although it pains me every time. Alternatives: sign LOI without exclusivity and move fast on negotiating the APA (and pull the deposit if possible)...or call their bluff and wait for the deal to boomerang back, at which time you'll have more leverage to play it your way.

Reply by an intermediary
from Arizona State University in Long Beach, CA, USA

Gordon, I see you are based in CA; is that where the business is located? In CA it's fairly common to go straight to an APA for smaller main street type deals with a standard form template from the CA Association of Business Brokers. For larger deals, we prefer to do an LOI first. Using escrow to place your Earnest Money Deposit is very common and normal. The APA should have a due diligence contingency period, along with other contingencies for lease, financing, etc., so you can cancel and get your deposit back if you decide not to move forward. There are pros and cons to using an LOI or going straight to APA. If you have had adequate access to due diligence docs to feel fairly confident about moving forward, I don't see it as a problem (unless it is a larger and more complicated transaction). One middle ground solution would be to ask for a few days (ex. 10 days) after signing APA to send your deposit to escrow, so that way, you are further along with due diligence and will feel much more confident about moving forward with making a deposit.

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