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
from University of Pennsylvania in Charlotte, NC, USA
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!
from University of Arizona in Denver, CO, USA