Multiple owners & broken deal costs
October 12, 2021
by an investor from Carnegie Mellon University - Tepper School of Business in Philadelphia, PA, USA
I've heard a few stories about the difficulties of completing a transaction when there are multiple equity owners of the target company. One gets cold feet a few days or weeks before closing and the searcher is left with a lot of diligence expenses and no deal.
Has anyone used a structure where they get individual equity holders to sign a contract stating that they'd split broken deal costs in the case that they don't want to sell? Or how to searchers manage a multiple owner sale? It seems to me that the risk of a broken deal rises exponentially as there are more parties involved.
from University of Virginia in New York, NY, USA
Your concerns are valid. Explain to owners that you are about to spend a good amount of money working in good faith to close a transaction and have reservations negotiating with multiple decision makers that could hold up a deal.
This is a two way street. If the representations during diligence prove out using a reputable QofE provider and you whiff on securing financing that’s on you. If you show up to the table with a commitment letter and executable purchase agreement and they walk that’s on them.
The more you can negotiate at the LOI stage the less surprises you will have leading up to closing.
from Northwestern University in Chicago, IL, USA
You can try to include some type of termination fee in the LOI, but LOIs are typically soft commitments. I generally see these in the purchase agreement where you have a sign and close type of purchase agreement, i.e., you first sign the purchase agreement and then close after receiving all the consents from shareholders, vendors, regulatory approvals, etc. The only drawback of a termination fee is that the seller can ask for one, too.