~$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.
