Can I Get Paid If We Don't Close?

Sellers often ask if they can get their costs and expenses (e.g., accountant's fees, attorney's fees, etc.) paid or reimbursed if the sale of their business doesn't close. The answer depends on the timing of the termination, what the legal documents say, and what's customary.

1. Letter of Intent Phase - LOIs rarely, if ever, make a buyer pay or reimburse the seller for costs and expenses if the buyer terminates the deal. That's customary. One of the purposes of the LOI is to create a relationship where the buyer and seller are comfortable taking a short-term risk while the buyer thoroughly investigates the business. The buyer will invest time, money, and effort into its investigation and impliedly asks the seller to do the same. Each party bears its own costs and expenses knowing that the deal might be terminated.
   

2. Purchase Agreement Negotiation Phase - Before the purchase agreement is signed, there is no binding contract between the buyer and the seller. Again, it's customary that each party bears its own costs and expenses - i.e., invests its time, money, and effort into the deal. This is a bigger risk because negotiation could take months, and each party will invest significant costs and expenses during that time. As a result, each party is trusting that the other party will act in good faith. If either party terminates the deal before signing the purchase agreement, the other party will be stuck with its costs and expenses. In rare circumstances, a seller might be able to sue a buyer for damages caused by the buyer's termination of the deal if the seller can prove that the buyer committed fraud or acted in bad faith. If the seller were to win that lawsuit, its damages could include the costs and expenses it incurred while relying on the buyer's actions during negotiation.
   

3. Post-Signing Phase - Once both the buyer and seller have signed the purchase agreement, the parties have a binding contract. The purchase agreement might contain language that requires the terminating party to pay the other party's costs and expenses if it terminates the deal. Even if the purchase agreement doesn't contain such language, the non-terminating party might have a breach of contract claim against the terminating party. If the non-terminating party were to win that lawsuit, its damages could include the costs and expenses it incurred in connection with the transaction.

Note that both the buyer and the seller are taking the risk that its costs and expenses won't be paid or reimbursed. If a seller were to ask the buyer to pay or reimburse it for its costs and expenses, the seller should expect one of two reactions. First, the buyer probably will simply reject the request because it's not customary. Second, the buyer might be willing to agree if the seller will agree to reimburse the buyer for its costs and expenses if the deal is terminated through no fault of the buyer - e.g., if the buyer terminates based on issues it discovers during due diligence. Frankly, I wouldn't advise a seller to agree to that request.

If you want to talk more about this issue and learn about some creative solutions I've seen used in rare occasions, please contact me at https://www.joelankney.com/contact.