Contingency against Seller's nonperformance under LOI

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July 18, 2023

by a searcher from North Carolina State University in Coral Springs, FL, USA

For business acquisition, both seller and buyer enter negotiation sessions for several months to get an executed LOI. There are many factors that could cause that acquisition to fail by parties on either side. The most common factor is the failure of seller to raise needed capital for the acquisition within the exclusivity period. The second most common factor is the seller pulling out from the non-binding LOI agreement for reasons that have nothing to do with the buyer who spends his dearest resources to complete his detailed due diligence and endures financial and business connection damages upon this event. The best solution to mitigate against these risk factors is to establish an escrow account with an independent escrow agent with escrow agreement. The escrow agreement shall include trigger events to disperse the escrow fund to a damaged party once triggered event has occurred. I would suggest a minimum of $25K to be placed in escrow by each party. If the buyer pulls out from the LOI for any reasons not listed in the LOI, then the escrow fund is a nice compensation for his business hold in the market. If the seller cannot get negotiation settlement with his broker for the brokerage fees, then the buyer is entitled to recover his financial loss and payoff his obligations to professional fees engaged in his incomplete due diligence services.

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Reply by a searcher
from Austin Community College in Austin, TX, USA
Similar to earnest money in a real estate deal but from both sides instead just the buyer.
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Reply by a searcher
in Austin, TX, USA
This is an interesting approach. Thanks for sharing.
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