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Sounds like there needs to be a way for the buyer to put some skin in the game. Maybe asking for a $50k non-refundable deposit to kick things off. Sounds harsh
by quickthrower2 7y ago
Sounds like there needs to be a way for the buyer to put some skin in the game. Maybe asking for a $50k non-refundable deposit to kick things off.
Sounds harsh? Well non-refundable deposits are a thing in real estate. For example in my country it is common to put 0.25% down to take the property off the market, non refundable, allowing you to do due diligence and then 19.75% deposit within 5 days non-refundable, with a closing period of say 30 days to pony up the other 80%, usually from finance. Probably the 19.75% is lost if finance doesn't come through but IANAL not sure if that holds up court or not or if you can get it back in some circumstances. But people understand it's serious you might lose it.
If you don't really need to sell but wouldn't mind $5m this would be a good way to weed out non-serious people. If everyone says NO then that's OK you keep on running the business as before. If anyone says yes then you know they are serious. They might not buy, but you get $50k compensation, which might be less than your costs, but the point is the $50k is like a way of communicating information 'we are serious' than an actual payment.
Asking for $50k from someone who invests $5m is like asking $50 deposit for someone who wants to book a luxury hotel room for a week. Maybe I should have said $100k (!)
- trentnix 7y agoAgreed. It’s perfectly acceptable for a business to ask for (or even demand) earnest money when signing an LOI. The buyer, via the LOI, is asking for the right to negotiate with you exclusively. That’s worth something and if they refuse, that tells you how serious they really are. The amount of that earnest money is up to the parties involved - 50k might be high for some situations, low for others, and just right for the rest. But they should pony up something. Otherwise you are just giving away leverage. As the article mentions, there is an incredible amount of work that goes into due diligence and sometimes an even larger emotional investment. A sale falling through, and I can speak from experience, can be devastating.
- mtnGoat 7y agoI agree in this case the author created this problem for himself by not following some norms, namely getting a non-refundable deposit for his time and energy. lesson learned for seller and a good reminder for the rest of us.
- kresten 7y agoYou’d be crazy to guarantee exclusivity when negotiating sale of your company. It would make more sense to give an absolute assurance that you’re talking to all possible buyers and that the potential buyer should understand that you might easily sell at any moment. Exclusive negotiation is the precise opposite of a good approach. Indeed implying that there are other negotiating parties is almost an essential component of any such negotiation.
- trentnix 7y agoThe LOI, at least the ones I've read, prevents you from discussing sale opportunities with anyone else. It's called a "no shop" clause. Before the LOI? Go crazy.
- kresten 7y agoI’d rather not do the deal than have a no shop clause. A no shop clause destroys so much deal leverage. I can see why the buyer would want it. In fact a no shop clause is indistinguishable from an exclusivity agreement. If the buyer absolutely required it I’d put a hefty non refundable price on it, probably 50% of deal value. Such a commitment has to work both ways.
- trentnix 7y agoAnd that's certainly your prerogative. Your preferences aside, a "no shop" clause is the norm.
- Seufman 7y agoNo shop clauses are normal -- no serious buyer would move forward with diligence without it
- deleted 7y ago[deleted]
- mlyle 7y agoAs others say, once you reach the point of a letter of intent-- there's no way a buyer wants you carrying their LOI around to everyone in the world trying to get a better offer while the buyer is committing resources trying to get the deal done. It's reasonable to expect a ("reverse") break-up fee, but it is not likely to be half the deal value.
- sowbug 7y agohttps://en.wikipedia.org/wiki/Breakup_fee https://en.wikipedia.org/wiki/Breakup_fee
- sheeshkebab 7y agoBreakup fee is opposite of what I think you mean
- sowbug 7y agoIt can be structured in either direction.
- 6gvONxR4sf7o 7y agoOr just have the buyer pay both sides' acquisition related fees from the get go (legal, accounting, etc).
- s1artibartfast 7y agoThis is fairly common in M&A and is called a "reverse termination or reverse breakup fee". In addition to the direct cost of having a deal fall through, you can imagine other damages from having a major competitor scrutinize your books. Some notable reverse break up fees include: * a 6 Billion dollar fee AT&T incurred for failing to complete a purchase of T-mobile. * A 10 Billion fee (avoided) if Verizon backed out of buying Vodafone's stake in Verizon.
- einarvollset 7y agoUsually not at the LOI stage, no. The ones you quote a post purchase agreements I believe.
- Mr_2020 7y ago~$8m price. Asked for $25,000 break fee to cover our costs. Was balked at. Have no reason to believe they were not serious buyers as they bought another company or two.
- deleted 7y ago[deleted]
- einarvollset 7y agoThis is the only reality based, sensible comment in this whole thread. Well done.
- charlesdm 7y agoI'm based in Europe but together with a partner I'm a buyer of small tech businesses. We have bought businesses so are credible and are always interested in buying more. We could pay $8m if an interesting business came along. The issue is that a lot of smaller deals fall through, either because of unrealistic final price expectations by the seller or because some metric that is super important to the business was calculated and supplied in the wrong way (i.e. churn). Or there are issues in structuring the contract because the seller (or his legal advisor) "overengineers" the contract -- lawyers can and sometimes do end up killing deals. As a buyer, if I pay you a $25k fee, you now have leverage over me. Because if the deal doesn't happen I'm out $25k. If I don't pay you anything you're incentivized to get the deal done and try and draft a balanced sale/purchase agreement that works for seller and buyer. That means both parties making concessions on terms. In my mind, that is healthy, because if we finalise the deal you're getting a bag of money. Let's say there is a clause we just can't find each other on. No worries, we can jointly decide to walk away. If I paid you and you're not willing to budge, then I'm out $25k if I walk away. It doesn't keep the discussion balanced. Add to that that some people might (in the end) be unsure whether they even want to sell or not, and you end up in a situation where it's all mostly uncertainty (for both parties) until the deal closes.
- dgudkov 7y agoIf you asked them for a commitment (i.e stop looking for other buyers) then you should be ready to commit too. If not money, what would be your commitment?
- megablast 7y agoIf cost ATT $4B after it failed to merge to T-Mobile. https://en.wikipedia.org/wiki/Attempted_purchase_of_T-Mobile_USA_by_AT%26T https://en.wikipedia.org/wiki/Attempted_purchase_of_T-Mobile...