"10 out of 10 searchers say that broken deal fees are a serious damper to their acquisition efforts."

Would you agree?

There’s nothing like a deal breaking after you’ve spent $30K, $40K, or even more, to make you question the ETA process.

Fortunately, with a bit of careful planning, we can drastically reduce the chances of incurring broken deal fees.

After successfully closing over 80 deals and advising on many more (including many that died partway), I’m sharing my best tips for minimizing the chances of wasting your search costs on broken deals.

I like to call it my “Deal Fee Protection Plan,” and I’m sharing all the details in this issue.

To put everything into proper context, we will proceed in three parts:

1. Why Do Deals Break? Understanding why deals break helps us protect against broken deal fees.
2. Buy-Side Deal Fees: Let's make sure we know what fees we’re talking about.
3. Deal Fee Protection Plan: Tips for protecting your deal fees from broken deals.

Why Do Deals Break?

In my experience, there are only a few reasons why deals break:

1. Seller Believes You’re Re-Trading: Difficulty negotiating deal points is the most common reason for deal breaks. Any changes to the critical deal structure can be seen as “re-trading,” which turns off sellers.
2. Seller Changes Their Mind: Sometimes sellers simply change their minds.
3. Deal Delays Too Long: Time kills deals. Sellers anxious to sell can lose patience with extensive delays.
4. Seller Gets a Better Offer: Sometimes, sellers receive a better offer and walk away.
5. Funding Problems: Issues with SBA loans or investor funding can halt deals permanently.
6. Problems from Diligence: Due diligence can uncover issues that kill the deal.

Deal Fees

Now let’s talk about the fees you need to be concerned about:

1. Good Faith Deposit on the Deal: Mishandle this part, and you can lose a significant amount. In fact, if you'd like a gameplan for effectively handling requests for good faith deposits, you should check out issue #26 which is completely devoted to this topic.
2. Good Faith Deposit for SBA Loan: Almost all lenders will want a good faith deposit from you before they will go into underwriting on your deal.
3. Financial Diligence or Quality of Earnings Fee: This fee goes to your financial diligence provider. It’s often split 50/50 at signing and upon completion and can be one of the larger fees.
4. M&A Lawyer Deal Fee: This fee covers legal due diligence, deal agreements, and interfacing with your bank/investors. Most M&A lawyers charge a flat fee based on deal size. Some will stagger their billing throughout the life of your deal.
5. Entity Formation and Related Filing Fees: Forming one or more entities for your deal will incur legal and filing fees.
6. Other Diligence Providers: This includes insurance diligence, cyber-diligence, operational diligence, etc.

Deal Fee Protection Plan

Now that we know the common reasons for deal breakage and the common fees, let’s talk about how to protect your fees.

Here are my best tips, developed from advising on over 100 deals:

1. Agreement on Terms → LOI: Wait to write your LOI until you and the seller have met, discussed the deal, and reached an informal agreement on most terms. This makes the LOI more meaningful. The "double agreement" - ie verbal and in writing, also helps avoid situations where the seller walks away.
2. Detailed LOI Including Potential Hurdles: Anticipate deal hurdles (like standby creditor agreements or F reorgs) and discuss them early. Clearly call them out in your LOI.
3. Lending Before Financial DD: Secure lending as early as possible. If you can’t get lender approval, don’t move forward. This eliminates a major deal-killer before incurring more fees.
4. Financial DD Before Legal: Issues uncovered during financial diligence are more likely to kill the deal. Most issues found in legal DD can be fixed, worked around, or addressed in the final agreements. Complete financial DD before moving on to legal diligence to save on legal fees if the deal dies.
5. Work with M&A Specialists who charge Flat Fees and Spread-Out Billing: This provides predictable costs and ensures that if your deal dies, you won’t be billed for future services.
6. Front-Load Common Obstacles: Address issues like landlord consent and net working capital peg early. If the deal can’t get past these common problem areas, you minimize your outlay.

Conserving deal costs is critical when self-funding an acquisition search. My Deal Fee Protection Plan will help you protect your hard-earned money and maximize the chances that the fees you do expend lead to a positive result.

Happy deal hunting!

Eric

Did I miss anything? Got questions or war stories to share? Hit me up at eric@clearfocuslaw.com or on X.