Dive into the captivating world of M&A with ‘Financing Hurdles and Legal Lessons: A Cautionary M&A Tale.’ Uncover the intricate dynamics of a failed acquisition attempt, revealing valuable insights for entrepreneurs and professionals navigating the complexities of mergers and acquisitions. Explore financing contingencies, legal ramifications, and strategic moves in this compelling narrative.
M&A Stories
June 20, 2018
In the dynamic realm of mergers and acquisitions, a recent case sheds light on the intricacies surrounding financing contingencies and their potential legal ramifications. The narrative revolves around a failed attempt to acquire a gas station/convenience store, offering valuable insights for entrepreneurs, business owners, and professionals navigating the complex M&A landscape.
The protagonists in this story were a buyer and seller who embarked on an asset purchase agreement for a gas station/convenience store, encompassing the accompanying real estate, with a purchase price of $1.6 million.
The agreement granted the buyer a 120-day window to secure financing under commercially reasonable terms. However, a twist emerged when a preliminary title report revealed that the seller’s property was entangled in a looming foreclosure action.
Undeterred, the buyer sought the assistance of a seasoned financial broker, previously successful in securing financing for the buyer’s ventures. Alas, after reaching out to nine banks, all responded with a resounding no, citing the pending foreclosure as a deal-breaker.
As the financing contingency period lapsed on December 16, 2015, the buyer found themselves without the necessary funds, leading to the collapse of the deal. Subsequently, the seller refinanced its loans in January 2016, and the foreclosure threat dissipated. The business was eventually sold for $1.3 million on May 10, 2016.
Surprisingly, on May 26, 2016, the seller initiated legal action, accusing the buyer of breach of contract. The claim sought $300,000 in damages, representing the variance between the initial $1.6 million deal and the eventual $1.3 million transaction.
However, the trial court ruled in favor of the buyer, a decision later upheld on appeal.
Commentary: While the legal outcome favored the buyer, a strategic move could have spared them from potential litigation. Sending a written notice to the seller at the expiry of the 120-day period, clearly stating the deal’s termination and the buyer’s release from any further obligations, might have preemptively averted legal complications.
Case Reference:
This case is referred to as Hometown Station, Inc. v. Jessey, No. 32A01-1707-PL-1548, Court of Appeals of Indiana (February 2, 2018).
By John McCauley: I help people start, grow, buy and sell their businesses.
Email: jmccauley@mk-law.com
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Check out my book: Buying Assets of a Small Business: Problems Taken From Recent Legal Battles
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