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Agreed. 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
by trentnix 7y ago
Agreed.
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.
- kresten 7y agoMaybe a no shop clause should have a tight time to live.... “ok we commit but only if you put the money in our account within seven days, after that shopping is ok”
- mlyle 7y agoDeals take a lot longer than 7 days to close-- especially real acquisitions, but even asset purchases usually take months.
- Shpigford 7y agoFor better or worse, exclusivity in an LOI is the norm. Obviously, you don't have to accept the LOI, but any LOI that is missing exclusivity is usually a sign of inexperience and honestly is cause for concern.