The seller did not disclose the terms of the finder’s agreement and led the buyer to believe that the finder’s role was limited, and that the finder could be compensated with hockey tickets, while arbitration awarded a $2 million finder’s fee.
M&A Stories
June 6, 2022
Introduction:
In this M&A case from 2016, a financial adviser acted as a finder to help sell a service provider in the Greater New York area to a gas utility segment for $33 million. The finder’s role was crucial in connecting the seller with potential buyers, but the actual buyer was not involved in the process. A dispute arose when the buyer was unexpectedly held responsible for paying a $2 million finder’s fee.
The Deal
In 2015, the seller engaged a finder to locate a suitable buyer for their business, agreeing on a 4% success fee, detailed in an unsigned engagement agreement. The finder worked extensively with prospective buyers but didn’t directly assist in the final transaction with the ultimate buyer.
The Buyer’s Agreement:
As part of the asset purchase agreement, the buyer agreed to cover the finder’s fee. However, the seller did not fully disclose the terms of the finder’s agreement to the buyer, leading the buyer to believe the finder’s role was limited and could be compensated with hockey tickets.
The Lawsuit
After the deal was completed, the finder filed a claim against the seller, seeking the $2 million finder’s fee. In response, the seller sued the buyer in a New York state court to recover the fee, citing the asset purchase agreement’s obligation. However, the court ruled in favor of the buyer, stating that the buyer was not bound to pay the fee because the seller failed to disclose the full terms of the finder’s agreement.
This case is referred to as PCT Contr., LLC v. Riggs Distler & Co., Inc., Index No. 655278/2018., Supreme Court, New York County, (May 2, 2022)
Lesson Learned:
This case highlights the importance of thoroughly understanding and clarifying all aspects of a finder’s fee agreement. Buyers should never agree to such fees without reviewing the agreement, even if it remains unsigned. It is crucial to communicate directly with the finder to determine the fee amount and the reasons behind it. Similarly, sellers should discuss the finder’s compensation openly before the closing to avoid any confusion or legal disputes.
By John McCauley: I write about recent legal problems of buyers and sellers of small businesses.
Email: jmccauley@mk-law.com
Profile: http://www.martindale.com/John-B-McCauley/176725-lawyer.htm
Telephone: 714 273-6291
Check out my book: Buying Assets of a Small Business: Problems Taken From Recent Legal Battles
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