Capittal's view: the buyer walked away after the LOI, what can you do?

Quick answer

Capittal's view is that you will almost never be able to claim the price of the failed transaction, because the economic part of an LOI is non-binding and the buyer can walk away during due diligence without paying for it. What you can claim are the obligations that are genuinely binding in writing —confidentiality, exclusivity, non-solicitation of employees and customers, and cost sharing— and what you can do is reorganise the process and go back to the market in a few months with the information already cleaned up.

Which parts of the LOI are actually binding?

An LOI mixes two documents into one. The commercial part —price, multiple, payment structure, earn-out, timetable— is a statement of intent and does not oblige anyone to close. The legal part is binding from signature and survives a breakdown. If your LOI does not expressly distinguish between the two blocks, that is where the dispute begins. At Capittal we set out the binding clauses in a separate section, under that literal heading.

We have already published a guide on what an LOI is and another on the SPA; here we take that ground as read.

Can I claim compensation because they walked away?

Only if the buyer acted in bad faith, and that is hard to prove. Under Spanish law, parties are free to negotiate and equally free to break off: the breakdown of preliminary negotiations does not in itself create liability. It does create liability when one party generates a reasonable expectation of closing and then withdraws without cause, or negotiates with no real intention of buying.

These are the situations that do support a claim for precontractual liability:

• The buyer entered the process to access your commercial information, not to buy.
• They used exclusivity to freeze you while they closed another deal in your sector.
• They caused you to incur specific costs while promising a closing they had already ruled out internally.
• They have used data from the information memorandum or the data room to poach your customers or employees.

What is compensated in those cases is the proven actual loss —adviser fees, reports, demonstrable opportunity cost— not the price you would have received. Nobody is going to compensate you for the deal that never came into existence.

What is a break-up fee and why do I hardly ever see one in my deal?

A break-up fee is an amount one party pays the other if it breaks off the deal without an agreed cause. It is common in listed-company transactions and in large deals with competition between buyers. In the Spanish mid-market it is uncommon.

There are three reasons. A mid-market buyer rejects a fixed cost before seeing the numbers from the inside. The seller rarely has the leverage to impose one, except in auctions with several genuinely interested parties. And a symmetrical fee also exposes you, because a seller who walks away pays too.

The alternative that does get signed is more modest: cost sharing that covers the reports commissioned at the buyer's request, and a short exclusivity with extension conditions.

How much has exclusivity really cost me?

More than the advisers' invoice. The damage from exclusivity is process damage, and it is paid in four currencies.

• Time. Months of management focused on the deal rather than the business, with the risk that the year's results suffer just when you go back out to show figures.
• Cooled-off alternative buyers. Those who came second have allocated their capital elsewhere or have lost the team that handled your file.
• Information handed over. Margins by customer, contracts, pricing policy and cost structure are already in the hands of someone who is not buying.
• Internal exposure. If the management team knew about the process, the breakdown creates noise that has to be managed immediately.

That is why Capittal does not grant open-ended exclusivity. We grant it capped in weeks, with defined due diligence milestones and automatic lapse if the buyer misses the timetable.

Why do buyers walk away during due diligence, and how much of it is my fault?

Separate the causes that depend on you from the ones that do not. You can only fix the former, and they are also the ones that sink the price even if the buyer stays.

If the cause sits in the first column, the good news is that you now know exactly what to fix. A buyer has given you for free the diagnosis you needed.

How do I relaunch the process without looking like damaged goods?

The market does not remember your deal, it remembers your explanation. A company burns itself when it reappears with the same information memorandum, the same price and no account of what happened. It does not burn itself simply by having had a deal break down.

The sequence we apply at Capittal is this:

• Close things formally with the outgoing buyer: termination letter, end of exclusivity, return or destruction of information and written confirmation that confidentiality remains in force.
• Run a genuine post mortem with your adviser and with the buyer if they agree to explain themselves. Write the reason down in one sentence.
• Fix what can be fixed and document it with dates and supporting evidence.
• Update the figures to the latest year end and rebuild the information memorandum with the resolved contingency explained inside it, not hidden.
• Reopen with a different buyer list, or with the same candidates but a new and verifiable story.

When they ask you in the next round what happened, answer with facts. “An employment contingency was identified, it was regularised in March, here is the report” closes the conversation. Saying that “it was not a cultural fit” opens it.

How long should I wait before going back to the market?

Capittal's practical rule of thumb is three to six months if the cause was on your side, and four to eight weeks if it was not.

When the problem was the buyer's —financing, change of thesis, committee— there is nothing to fix in your company and waiting only ages the information. Pick things up with the candidates who came second.

When the problem was yours, you need time to remediate and to evidence it. A tax contingency regularised three months ago, with its supporting documentation, is worth far more than the same contingency regularised last week. Going back before you have the paperwork forces you to repeat the conversation that already cost you a deal.

Why would a vendor due diligence have prevented this?

Because it finds the problem while it is still yours and not the buyer's. In a VDD the finding becomes a task on your list. In the buyer's due diligence, the same finding becomes a price reduction, a larger holdback or a walk-away.

A VDD also changes the rhythm of the process: it shortens the buyer's due diligence, reduces the weeks of exclusivity you need to grant and lets you enter negotiations knowing what you will be asked. We have a dedicated piece on how a vendor due diligence is prepared.

The next step: knowing what your company is worth today

Before reopening a process it is worth being clear about the real starting point, with the contingency that emerged already built into the analysis. Capittal Transacciones prepares confidential valuations for companies in the 3 to 250 million euro range, reviewed directly by a partner.

We operate from eight offices —Barcelona as headquarters, Madrid, Girona, Lleida, Tarragona, Palma, Zaragoza and Valencia— and we are part of the NRRO group, which allows us to handle the tax and employment side of the file with the same team. If your deal has broken down in due diligence, the useful conversation starts by understanding what broke.