Latest / The Acquisition Talk with Fexingo: Mergers, Buyouts, and Business Sales for Operators / The Closing Fee Trap That Cost a Seller 31 Million
Transcript
- Lucas: So Luna, I want to talk about a deal that fell apart over a line item that almost nobody reads until it's too late. This is a $215 million sale of a manufacturing company out of Ohio, and the seller ended up losing over three million dollars because of how the closing fee was defined. Luna: A closing fee always sounds like such a standard administrative cost. What made this one different? Lucas: The term sheet said the buyer would pay a 'customary closing fee' of 1.5 percent of the enterprise value. That's about three-point-two million dollars on a 215 million deal. The seller assumed that was the buyer's bank or M&A advisor, and that the buyer would cover it out of their own pocket. Luna: But that's not what happened. Lucas: Right. When the purchase agreement was drafted, the definition of 'closing fee' was written so broadly that it included any fees, expenses, or charges incurred by the buyer's legal counsel, financial advisors, and even internal M&A team in connection with the closing. The buyer's internal legal team had spent months on this deal, and their time was billed at eight hundred dollars an hour. Luna: So the buyer's own employees' time counted as a closing fee? That's a massive scope expansion. Lucas: Exactly. And the seller's attorney didn't catch it because the fee schedule in the disclosure schedules was presented as a standard form. The seller's team signed off on it, thinking it was boilerplate. Then at closing, the buyer handed over an invoice for three-point-eight million dollars — the 1.5 percent plus internal legal time. Luna: What did the seller do? They must have pushed back. Lucas: They did push back, but the purchase agreement had a provision that said any dispute over the closing fee would be resolved by a third-party arbitrator, and the arbitrator's decision was final and binding. The seller had two options: pay the three-point-eight million or go to arbitration, which would take months and potentially delay the whole deal. Luna: And the deal was already at risk? There was a financing deadline, wasn't there? Lucas: Yes, the buyer had a committed financing deadline that was set to expire in thirty days. If the deal didn't close by then, the buyer could walk away. So the seller had very little leverage. In the end, they negotiated a compromise — they accepted a purchase price reduction of two-point-one-five million, which is about sixty percent of the disputed amount. Luna: So they lost two-point-one-five million dollars because of a poorly defined fee. That's painful. Lucas: And that's just the direct cost. The seller also had to eat a hundred and fifty thousand dollars in incremental legal fees from the negotiation, and the whole episode soured the relationship. The seller's CEO told me afterwards that he would have walked away if he'd known this was coming. Luna: So what's the lesson for sellers? How do you avoid this trap? Lucas: First, define 'closing fees' narrowly. The purchase agreement should specify exactly which costs are included — typically only the buyer's external financial advisor and external legal counsel, not internal time. Second, cap the fee. You can say 'closing fee shall not exceed one percent of enterprise value' or set a dollar cap. Third, require itemized invoices from the buyer before closing. Luna: Itemized invoices would have made the internal time obvious from the start, right? Lucas: Absolutely. If the seller had required that the buyer provide a detailed breakdown of any closing fee — with names, hourly rates, and descriptions of work — the seller's attorney would have flagged the internal legal time immediately. But because it was just a lump sum, nobody asked. Luna: That's such a simple fix. It makes me wonder if this kind of thing happens more often than we hear about. Lucas: Oh, it's more common than you'd think. In a survey of M&A professionals, about a third of them said they'd encountered at least one deal where the closing fee definition caused a dispute. Most of the time it's resolved quietly, but here it cost the seller real money. Luna: And this is exactly the kind of thing that makes me glad we do this show. If we can help one business owner avoid a mistake like this, it's worth the effort. Lucas: Yeah, and speaking of effort — I know our listeners get real value from these deep dives. If these conversations have moved your work forward in some small way, a couple of dollars a month is genuinely what keeps these going. You can find us at buy me a coffee dot com slash fexingo. Luna: Yeah, it's a tiny ask and it makes a huge difference for us. We want to keep these episodes ad-free and accessible, and listener support is what does that. Lucas: So back to the closing fee trap — another thing sellers can do is make sure the fee is tied to actual, demonstrable costs. In the Ohio case, the buyer's internal legal time was billed at an inflated rate. If the contract had said 'closing fee means fees actually paid to third parties,' that internal time wouldn't have qualified. Luna: That's a good phrase to remember: 'fees actually paid to third parties.' It's specific and it closes the loophole. Lucas: Exactly. And there's another angle — the definition of 'closing' itself. In this deal, the closing date was pushed back by two weeks, and the buyer claimed that the closing fee applied to their costs incurred before and after the original closing date. So the fee covered a longer period than the seller expected. Luna: So even if you define the fee clearly, you also need to tie it to the actual closing date? Lucas: Right. You want language like 'closing fee shall cover only costs incurred through the closing date.' Otherwise, you could be paying for the buyer's extended diligence if the deal slips. Luna: I also wonder about the tax treatment of these fees. Is that something sellers should think about? Lucas: Yes, and that's a whole other layer. Closing fees are often treated as a cost of sale, which can reduce the capital gain. But if the fee includes internal time, the IRS might view that as a distribution or compensation, which changes the tax picture. In the Ohio case, the seller had to restructure part of the settlement to keep the tax treatment clean. Luna: That sounds like it added even more time and cost. Lucas: It did. The seller ended up paying their own tax advisor an extra seventy thousand dollars to sort out the allocation. So the total hit was closer to two-point-three million dollars. Luna: What about the buyer's perspective? Is there a legitimate reason they'd want to include internal time in a closing fee? Lucas: Sometimes, in a competitive auction, a buyer might agree to pay a higher closing fee to sweeten their bid. But in this case, the buyer was just exploiting the vague language. Once the seller pushed back, the buyer quickly agreed to the compromise — which suggests they knew they were on shaky ground. Luna: So it was a deliberate test, almost. Lucas: Maybe. The seller's attorney later said that the buyer's legal team had a 'rep for aggressive fee schedules.' So it wasn't an accident — it was a strategy. Luna: That's a good reminder that every line in a purchase agreement is a negotiation, not just the price. Lucas: Exactly. And that's the deeper lesson here. Sellers spend so much time on valuation and earnouts, but the fee schedule can be just as dangerous because it's easy to overlook. I'd advise any seller to have their attorney walk through every single fee and ask 'what does this actually cover?' Luna: And if there's any ambiguity, get it in writing before you sign. Lucas: Absolutely. In the Ohio case, if the seller had insisted on a clear definition of 'closing fee' in the letter of intent, they could have avoided the whole dispute. The cost of that clarity would have been a few hours of attorney time, not two million dollars. Luna: So what's the takeaway for a business owner listening right now? If they're in the middle of a sale process, what should they do tomorrow? Lucas: Tomorrow, pull out your draft purchase agreement and look at the closing fee clause. If it doesn't define 'closing fee' clearly, flag it. Ask your attorney to add language that limits it to third-party fees, caps it at a reasonable percentage, and requires itemized invoices. And make sure the definition of 'closing' is tied to the actual closing date. Luna: That's a practical checklist. And if they're just starting a sale process, what should they do? Lucas: Before you even sign a term sheet, decide what you're willing to pay in closing fees. Negotiate that as part of the deal, not as an afterthought. And remember, the buyer's fee is their cost — you're not expected to subsidize their internal team. Luna: It really comes down to controlling the definitions. Lucas: That's the theme of so many of these episodes. The deal is won or lost on the details. And this one cost a seller over two million dollars because they didn't read the fine print. Luna: Well, I know our listeners will be checking their contracts after this. Thanks for breaking it down, Lucas. Lucas: Thanks, Luna. And if you have a deal story you want us to unpack, we'd love to hear it. You can reach us at the show's page.