Straight to Binding Purchase Agreement

by a searcher from Indiana University at Bloomington

3 years ago

We submitted an LOI. Structure and consideration were accepted, but the seller wants us to move straight to a purchase agreement. That means we are paying legal expenses before confirmatory due diligence is even started. This is for a property management business and moving straight to a purchase agreement is rare, but does happen in choice locations like this one.

Anyone have experience moving to a purchase agreement before starting confirmatory due diligence? Any pitfalls that we should be aware of (e.g. broken deal costs)?

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investor from The University of Chicago - Booth School of Business

Most transactions are a simultaneous sign and close. You start with a non-binding LOI (other than exclusivity, expenses & confidentiality) and effectively only make the all-in legal commitment upon signing of the definitive agreement. Your situation is akin to a deferred closing where there is a time gap between signing and the ultimate close (done for specific reasons). The pitfall to all of this is that you waste a lot of time negotiating preclosing convenants. What happens if COVID hits? What if the major customer walks? Etc. If you sign a binding agreement, you need the ability to walk away if the world collapses. It takes time to sort and negotiate this all out. My guess would be that your circumstances do not justify a deferred closing other than appeasing the seller. You should be able to successfully convince the seller otherwise.

3 years ago | like reply | 1 like

searcher from Cornell University

Congratulations on the LOI

3 years ago | like reply | 0 likes

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