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Should Buyer Use a Letter of Intent (LOI) or an Offer to Purchase Agreement?
Buyer wants to use LOI but seller's broker is insisting on his Offer to Purchase agreement. How should the buyer handle?

Question:
I want to use a Letter of Intent to make my offer on a small auto repair business. The seller's broker insists that I use his full Offer to Purchase agreement. I like the business, have completed my valuation, and my offer will be close to the seller's price, but it just seems more reasonable and customary to use an LOI as a first step don't you think?

Answer:
There's no question that an LOI can be a logical approach as a first offer but by no means is it a standard step. In fact, it should be the exception. Personally, I like to move forward with a full blown Offer to Purchase contract versus an LOI wherever possible because it gets all issues onto the table for resolution versus a non-binding LOI.

An LOI is best used for:

• Large transactions
• Situations where time is of the essence and you wish to tie up the business somewhat
• Your valuation is dramatically lower from the seller and you want to put out a feeler to measure their counter on price and terms.

Insofar as the broker contract is concerned, the vast majority of agreements I have seen used by brokers are satisfactory as a template but almost always need some revisions to reflect the particular acquisition. My suggestion is that you first get a copy of the agreement the broker would like you to use. Review it and note your comments as well as any additional conditions/contingencies that you need to have as part of the contract. Then, send it to your attorney for review. Try to get it in "Word" format so your attorney can work off it as it will save you a ton of money versus having them redraft it.

Richard Parker is the author of: How To Buy A Good Business At A Great Price, the most widely used reference resource and strategy guide for buying a business. He has purchased ten businesses in his career and has helped thousands of prospective buyers worldwide learn how to buy the right business for sale. He is also founder and President of Diomo Corporation - The Business Buyer Resource Center.

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