Alright, so you received a Letter of Intent (LOI) with a reasonable offer. Sounds good, right?
Yes, but in addition to the purchase price and deal structure, there are other essential aspects of the agreement that must be discussed and negotiated. Two of the significant terms which other online business brokers might not emphasize are earnest deposits and exclusivity. In this section we will discuss the meaning and importance of each.
It goes without saying that most buyers would prefer not to put down a deposit once the LOI is agreed upon. However, as our client’s broker and advisor, we believe it is a necessity. An earnest deposit is typically equivalent to about 5-10% of the total transaction value and is almost always fully refundable should the deal not get to closing.
The primary reason behind the deposit requirement is really a show of good faith on the buyer’s part that they are somewhat financially qualified to fund the transaction. With a seller providing sensitive financial information and revealing many aspects of the business during the due diligence phase, an earnest money deposit is customary for transactions of all sizes / types as it proves the buyer is serious.
If a buyer refuses to come up with an earnest deposit, which is held in escrow, then that clearly illustrates that they either do not have the money to close or that they are NOT as serious as they have demonstrated. After all, a non-binding piece of paper (LOI) without an earnest deposit is not sufficient for our clients to engage in the due diligence phase, and we advise them as such.
Some buyers request 100% exclusivity upon execution of the LOI, which means that we can no longer market the business. That is troublesome as there is no guaranty that the buyer will close and if he does in fact back out of the transaction, then we would have to begin our process from square one again.
We understand that the buyer needs some sort of comfort that if he is going to expend a lot of time and money into due diligence, he does not want to risk the seller having the ability to “ditch” him and engage with another buyer. That is perfectly understandable.
That is the reason that we propose to add exclusivity language which is more than fair. The language that we have drafted for this exact purpose clearly gives the buyer an exclusive on the business and ensures that he has the exclusive right to execute or cancel the deal up until the closing date.
So, for instance, on a deal with a 30 day due diligence period, without a non-refundable deposit, a buyer can technically walk away from the deal for any reason on the last day of due diligence while retrieving their entire deposit, which means we would have lost an entire month on this listing.
As a result, we need the ability to continue to field backup offers in case a buyer decides to back out at the last minute. Therefore, if the buyer does back out, I can immediately engage with the other serious buyers who I have cultivated and retained during that month, for that very reason.
If the buyer does genuinely want the business, which most do, then this should not be a concern as the language clearly ensures that they have the EXCLUSIVE first right to execute the deal up until the closing date, and that any other offers received could only be treated as backup offers if they don’t close on the deal.