Signing More than One LOI - Bad Faith or Just Building a Funnel?

February 13, 2023

by a searcher from Yale University - School of Management in Boston, MA, USA

You spend months on end looking for potential deals and nothing worthwhile that meets your search criteria comes up. Yet, in a span of a week, you come across a couple of opportunities that seem to be a great fit. Good opportunities don't stay on the market for long and you don't want to lose either option, in the event one of them goes south during DD. Do you put both opportunities under an LOI with the understanding that you will have to walk away from at least one of them? Or do you place your bet on a stronger candidate? Is putting both opportunities under an LOI a act of bad faith or is it a generally acceptable approach? I would love to hear your thoughts.

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Reply by an investor
from University of Pennsylvania in Charlotte, NC, USA

Interesting range of perspectives here. On one end of the spectrum an LOI is said to be only an "acknowledgement of interest", and on the other end, the exploratory due diligence work should have been done prior to submitting a proposal. Personally as both an advisor and investor, I agree with the latter approach and believe all parties would be better off adopting it. In most deals north of about $3MM EBITDA (assuming experienced representation) there is an exploratory due diligence stage after which interested parties are asked to submit an IOI - Indication Of Interest as was noted above. An IOI does not have an exclusivity provision. The banker and seller client select the top 3-5 (plus or minus) to proceed with further due diligence followed by submitting an LOI. Again the I in LOI is Intent and if you don't fully intend to close on the terms of your letter based on what you know to that point, it's bad faith to submit one. (The OP's question was about submitting two LOIs while NOT intending to close both.) A smaller deal may not need these two stages but the approach of requiring/doing enough DD upfront as the basis for a meaningful proposal/LOI still has merit. I know that's not the majority view here, but maybe worth thinking about to differentiate yourself as a thoughtful professional buyer (or seller for that matter.) I also realize that's not the usual business broker approach and I understand the reasons for that - not being critical here just presenting a viewpoint.

Reply by an intermediary
from University of Texas at Austin in Austin, TX, USA

Opinion against the grain:

Generally, this is not a good idea, but -- I could maybe support this *IF* you plan to "fail fast" and pick a bride to walk down the aisle with within a few days.

As an intermediary, an in-hand LOI can be a lot of leverage for me - with other buyers, with the seller, with a lender, etc. Most deals are poorly represented (sorry, to my profession - but also not sorry) - and I would really hate my seller to miss out on a strong buyer because someone was chasing what *appeared* to be a much better deal, but with a quick look under the hood - was not.

Before you '@' me -- yes, of course, LOIs are confidential, but it doesn't mean I don't use them to my advantage to get my seller the best possible deal.

*IF* you plan to jack around for###-###-#### days on two exclusive LOIs - then you get my very best BOO! BOOOOOOO! <Insert The Princess Bride GIF here>. All comments above about why not to do this apply.

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