Have you negotiated an LOI with a breakup fee instead of exclusivity?

June 06, 2024

by a searcher from University of California, Berkeley in Irvine, CA, USA

I am negotiating an LOI where the seller will not accept full exclusivity, but one that triggers after conditions are met (e.g. financing approval).

Currently, the breakup fee is approximately 1% for either party if we walk away after diligence is complete (30 days).

My concern is that this is a set up for distrust/litigation. However, I understand that the seller has valid concerns about taking the deal off the market if I am unable to close.

Have you seen this work successfully?

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Reply by an intermediary
from Southern Methodist University in Fort Lauderdale, FL, USA

As a buyer in this case, some of my position would depend on how much information I've been given access to. Do I just have a CIM and some tax returns, or do I have an entire data room filled with everything you could think of? What I'm getting at is, do I have enough information to feel confident that the business is actually performing at the level that the seller has represented. My experience is, it often isn't. So, there's likely some risk there. But my second thought is, if you are somewhat confident but the seller is concerned about your ability to close, consider asking them for a shorter exclusivity period to start and you'll revisit the progress at the end of that period. If you've made respectable progress and been responsive to bank requests, and deal is moving on, seller will not unreasonably withhold an extension. I often use this logic on the sell-side when buyers ask for longer exclusivity periods. For instance, instead of 90 days, we'll grant 60 and say, let's see what the progress is after 60 days. If you're doing your job as a buyer and we're moving along, my client will give an extension. If you're slow playing us and the bank, we're moving on.

all this being said, please consult an experienced M&A attorney when considering this language and structure. Best of luck!

-w

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

Many interesting perspectives here. I agree with the 3 points made by ^redacted‌ and will add that over 100+ closed deals we've not seen a breakup fee when buyer and seller are experienced and have done their respective parts (critical) to get to the point of a meaningful LOI. I know some business brokers seek to include provisions allowing continued marketing and even accepting backup offers while under "exclusivity", but many on the buyside and sellside consider it a bad idea. Enforceability prospects are roughly nil at any rate. There are many threads here on this topic - exclusivity, break fees, backup offers. etc. Search any of those terms.

Without a fuller description of your deal situation, the responses here are going to be so varied that it's meaningless. Not that the opinions are wrong, just that they may be entirely unsuited to your situation.

Final point: it sounds like your breakup fee requires you to pay 1% if you walk away; so if your due diligence turns up unacceptable risks, misrepresentations, inadequate records, etc., which cause you to abandon the deal, then you pay seller 1%. Seems like a bad position for you.

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