Quick background: I'm selling my HVAC company (roughly $4M revenue, asset sale). We signed the purchase agreement three weeks ago, and the buyer just informed me their financing fell through. Closing is supposed to be in 10 days. They're asking for a 60-day extension, but I'm not confident they can actually close even with more time. I have another interested party who's been waiting in the wings. What actually happens if the buyer breaches before closing? Can I keep the earnest money? Do I have to sue them? This is my first time selling a business and I'm trying not to get taken for a ride here.
M&A
What happens if a buyer breaches the purchase agreement before closing?
Read your purchase agreement. Seriously. The answer is almost certainly in there. Most of these have a specific remedy section that says whether earnest money is refundable or not, and what happens if financing falls through.
If financing was a condition of closing, and it wasn't their fault, they might have a legitimate out. But if they waived the financing contingency and then couldn't get the money, that's on them. Did your agreement have a financing contingency or not? That's the whole ballgame.
This happened to a friend of mine. Buyer flaked two weeks before closing, earnest money was $50k and he got to keep every penny. But it took him 4 months of legal back and forth to actually get it released from escrow because the buyer wouldn't sign the release. So "keeping" it is not the same as "having it in your hand"
lol OP you're about to learn why every M&A lawyer says 'the deal isn't done until the money is in the bank'
Also worth noting: specific performance is basically never granted for a business purchase like this. A court isn't going to force someone to buy your company. So your realistic remedies are keep the earnest money and/or sue for actual damages, which is a long expensive road. What you should be thinking about is whether your backup buyer is still available and how to moev them into first position.
Wait, can you even talk to the backup buyer right now without gteting in trouble? Like isn't there something in these contracts about that?
Depends if there's an exclusivity clause or no-shop provision still in effect. If the buyer is in breach and you've given notice and the cure period has passed, the exclusivity usually terminates too. But please, for the love of everything, talk to your attorney before you send the backup a purchase agreement. I'm not your lawyer, just a guy on a forum who has seen this go sideways.
Financing wasn't waived, it was a listed contingency in the agreement. Sounds like the backup buyer might be my path forward while I figure out what I can do with the escrow. I appreciate everyone's input, now I need to get on the phone. "The deal isn't done until the money is in the bank" is going to be my screen saver.