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.
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.