Straight to Binding Purchase Agreement

searcher profile

April 16, 2021

by a searcher from Indiana University at Bloomington in Chicago, IL, USA

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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commentor profile
Reply by an investor
from The University of Chicago in Chicago, IL, USA
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.
commentor profile
Reply by a searcher
from Cornell University in Ithaca, NY, USA
Congratulations on the LOI
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