Sounds like there needs to be a way for the buyer to put some skin in the game. Maybe asking for a $50k non-refundable deposit to kick things off.
Sounds harsh? Well non-refundable deposits are a thing in real estate. For example in my country it is common to put 0.25% down to take the property off the market, non refundable, allowing you to do due diligence and then 19.75% deposit within 5 days non-refundable, with a closing period of say 30 days to pony up the other 80%, usually from finance. Probably the 19.75% is lost if finance doesn't come through but IANAL not sure if that holds up court or not or if you can get it back in some circumstances. But people understand it's serious you might lose it.
If you don't really need to sell but wouldn't mind $5m this would be a good way to weed out non-serious people. If everyone says NO then that's OK you keep on running the business as before. If anyone says yes then you know they are serious. They might not buy, but you get $50k compensation, which might be less than your costs, but the point is the $50k is like a way of communicating information 'we are serious' than an actual payment.
Asking for $50k from someone who invests $5m is like asking $50 deposit for someone who wants to book a luxury hotel room for a week. Maybe I should have said $100k (!)
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.
You’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.
As 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.
Maybe 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”
There's a lot of misconceptions here around how corporate acquisitions work. Here's typically how things work in practice when companies are sold:
- Seller attempts to garner interest, sometimes facilitated by an investment bank.
- Buyers indicate interest informally, eventually culminating in a Letter of Intent (LOI) from each buyer indicating a price and other important factors related to a deal.
- A cricitical component of the LOI is an exclusivity period - a duration of time where the buyer is able to conduct due diligence in exclusivity. It's clearly in the best interest of the seller to minimize the duration of the exclusivity period.
- Discoveries in the exclusivity period are typically grounds for renegotiation. Vulture buyers typically crush sellers and completely renegotiate a deal in this period banking on the fact that the seller has no alternatives post exclusivity. Good buyers know their reputation is at stake if they renegotiate an LOI and will only do so if material things show up in diligence (reasonably common).
- The LOI is not an obligation to purchase. Mostly the buyer is putting their reputation on the line.
- Earnest money is extremely rare in corporate acquisitions because the buyer universe is sufficiently small such that reputation is a sufficient motivator for good behavior. That said, anything is negotiable and you can go against tradition at any point if you have enough leverage (interested buyers).
In the OPs case, the buyer was not disclosed. Did they lose any reputation? How to roll the ball to let people know that someone screwed you up without damaging own reputation?
I’m sure they did. All of Baremetrics lawyers and investors know who it is. Investor circles are small - word gets around. Same with lawyers. The number of times I’ve heard “yeah, we know those guys, I wouldn’t recommend working with them” in board meetings is high.
Brokers are pretty well connected and ours made sure to spread their name around. They'll have a hard time buying a company through typical routes for a while.
I'm also perfectly happy to let anyone know in private who it is. :) DM me on Twitter (@Shpigford) or email: josh@baremetrics.com
> What does "changes" mean in this context and what constitutes a reasonable reverse break-up fee?
It's unlikely whatever the buyer throws over the wall first is exactly what you want to sign.
> Also in #2, does "probe interest" mean getting them to sign a LOI?
If company A approaches you, wanting to acquire you, you want to really quickly figure out if company B, company C, and company D are interested before you commit to a period of exclusivity with A.
> If company A approaches you, wanting to acquire you, you want to really quickly figure out if company B, company C, and company D are interested before you commit to a period of exclusivity with A.
Let's say that company A, B and C are interested (with A being interested the most), what would be the next step? Can you get an offer without a LOI?
Good luck finding a counterparty that won't ask for a no shop clause. As a VC all our term sheets have legally binding no shop and confidentiality clauses. That's industry standard.
For 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.
I 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.
~$8m price. Asked for $25,000 break fee to cover our costs. Was balked at. Have no reason to believe they were not serious buyers as they bought another company or two.
I'm based in Europe but together with a partner I'm a buyer of small tech businesses. We have bought businesses so are credible and are always interested in buying more. We could pay $8m if an interesting business came along.
The issue is that a lot of smaller deals fall through, either because of unrealistic final price expectations by the seller or because some metric that is super important to the business was calculated and supplied in the wrong way (i.e. churn). Or there are issues in structuring the contract because the seller (or his legal advisor) "overengineers" the contract -- lawyers can and sometimes do end up killing deals.
As a buyer, if I pay you a $25k fee, you now have leverage over me. Because if the deal doesn't happen I'm out $25k. If I don't pay you anything you're incentivized to get the deal done and try and draft a balanced sale/purchase agreement that works for seller and buyer. That means both parties making concessions on terms. In my mind, that is healthy, because if we finalise the deal you're getting a bag of money.
Let's say there is a clause we just can't find each other on. No worries, we can jointly decide to walk away. If I paid you and you're not willing to budge, then I'm out $25k if I walk away. It doesn't keep the discussion balanced.
Add to that that some people might (in the end) be unsure whether they even want to sell or not, and you end up in a situation where it's all mostly uncertainty (for both parties) until the deal closes.
>Let's say there is a clause we just can't find each other on. No worries, we can jointly decide to walk away. If I paid you and you're not willing to budge, then I'm out $25k if I walk away. It doesn't keep the discussion balanced.
Balanced? Utter nonsense and I suspect you know it. You know that proceeding past an LOI involves the seller accruing costs, sinking massive amounts of time on activities other than working on their business, and, more often than not, becoming emotionally invested in 'doing the deal'. Buyers buy businesses a lot more frequently than sellers sell businesses, and that makes the transaction a "home game" for the buyer, giving buyers an advantage.
Not providing any earnest money minimizes buyer risk, allows buyers an opportunity for a cheap education on the ins and outs of a successful business, and invites other tactics to tilt negotiations away from the seller - all the reasons selling a business becomes one of the most painful experiences of an entrepreneur's professional life.
If you're not prepared to provide any earnest money, you probably haven't done enough work to decide whether you're really entering into an LOI. Hopefully, the sellers negotiating with buyers like you figure that out and push back.
If you asked them for a commitment (i.e stop looking for other buyers) then you should be ready to commit too. If not money, what would be your commitment?
Agreed - I sold a tech company in the UK for $6M a 2.5 years ago. The idea of a buyer paying a deposit is pipe-dream, as a seller you have to take a risk, you have to pay significant legal fees and a retainer to the broker and of course the due diligence is painful and time consuming. One thing that you can do is get to know the buyer well, before you commit, I studied their financials in depth, this gave me the confidence to go-ahead, knowing that they had the cash available. Unexpectedly to me, it was the buyer’s lawyer’s who nearly scuppered the deal on several occasions when I completely lost my temper with them - they were awful to deal with, extremely anal over minor details, impractical also untrustworthy, they kept resurrecting issues we thought had been resolved.
This is fairly common in M&A and is called a "reverse termination or reverse breakup fee".
In addition to the direct cost of having a deal fall through, you can imagine other damages from having a major competitor scrutinize your books.
Some notable reverse break up fees include:
* a 6 Billion dollar fee AT&T incurred for failing to complete a purchase of T-mobile.
* A 10 Billion fee (avoided) if Verizon backed out of buying Vodafone's stake in Verizon.
Sounds harsh? Well non-refundable deposits are a thing in real estate. For example in my country it is common to put 0.25% down to take the property off the market, non refundable, allowing you to do due diligence and then 19.75% deposit within 5 days non-refundable, with a closing period of say 30 days to pony up the other 80%, usually from finance. Probably the 19.75% is lost if finance doesn't come through but IANAL not sure if that holds up court or not or if you can get it back in some circumstances. But people understand it's serious you might lose it.
If you don't really need to sell but wouldn't mind $5m this would be a good way to weed out non-serious people. If everyone says NO then that's OK you keep on running the business as before. If anyone says yes then you know they are serious. They might not buy, but you get $50k compensation, which might be less than your costs, but the point is the $50k is like a way of communicating information 'we are serious' than an actual payment.
Asking for $50k from someone who invests $5m is like asking $50 deposit for someone who wants to book a luxury hotel room for a week. Maybe I should have said $100k (!)