Deal Breakup Fee - Does Anyone Have Experience?

June 26, 2024

by a searcher from University of Liverpool in Raleigh, NC, USA

I submitted an LOI for a deal, the sellers have indicated that they would like to move forward with me as the preferred buyer, however the broker has previously had some negative experiences with searchers and as a result wants to put in a breakup fee of $100k in the LOI, in the event that I am unable to obtain the funding for the deal.

Has anyone experienced this situation before, and if so, what advice would you give me?

Thanks

David

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Reply by an investor
from University of Pennsylvania in Charlotte, NC, USA

I strongly second the gist of the comments by ^redacted‌. Especially - "...the LOI is not an IOI nor is Due Diligence the time to decide if the deal is for you. DD should be confirmatory in nature and an LOI should never be submitted in haste prior to securing all financials, addressing questions you have. If you submit an LOI be prepared to close. ..." Now, that doesn't mean you will know with certainty that you can obtain bank financing at the time you submit an LOI, but you should have done enough work, including talking to bankers (and equity investors if needed), so that you have an informed view about securing the funding.

There is a growing problem for the ETA community with so many sending/signing LOIs without having done much if any due diligence or otherwise being unprepared to actually close on the LOI terms. That approach is creating a credibility issue for searchers - hence the requests for deposits, breakup fees, etc. It leads to searchers being disfavored in competitive processes, and is generally a nonproductive approach as it greatly increases the likelihood of not closing. One can argue the point about whether it's "right' to tie up a seller in exclusivity when you really have little idea about crossing the finish line. I'm sure that could be a lively discussion in a separate post.

You can tell the seller and broker that a breakup fee is not market (true, but an ineffective argument), try to make it reciprocal (very ineffective), etc., but your best response to a breakup fee request is having proved yourself a thoughtful and committed buyer through well-considered due diligence questions (yes, that's pre LOI), demonstrating consideration of the seller's objectives, writing a tailored LOI, and, as someone said above, having all your ducks in row and being able to demonstrate it. Having done these things, the seller and broker ought to see you as lower risk and you can credibly respond that your willingness to incur significant legal, accounting, etc. diligence expenses demonstrates your commitment to closing the transaction.

Good luck with your transaction!

Reply by an intermediary
from University of Arizona in Denver, CO, USA

As the ETA segment accelerates I expect more breakup fee requests and although we have not included them I would consider it, carefully. $100k on a deal where the buyer's cash injection is $500,000 or less would be excessive IMO. I think that there are more eloquent ways via the establishment of milestones and including the usual lease assignment and financing contingencies. Understand that not every searcher is viewed the same by the seller's representative and reputation does matter. Remember that the LOI is not an IOI nor is Due Diligence the time to decide if the deal is for you. DD should be confirmatory in nature and an LOI should never be submitted in haste prior to securing all financials, addressing questions you have. If you submit an LOI be prepared to close. Even in large markets, brokers and lenders talk, so protect your reputation at all times.

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