The Deal Collapsed. The Break Fee Kept It From Getting Worse

The situation

Mai led corporate development for a mechanical services group that had spent three years buying up electrical and plumbing contractors across Northern Ontario, folding each one into a shared back office while leaving the trade crews and the local name in place. Linh, the group's chief financial officer, ran diligence and financing on every deal. By the time they came to Treadstone Law, they had done four acquisitions this way and had a template they trusted.

The fifth target was a combined electrical-and-plumbing contracting business in Sault Ste. Marie, built over two decades by its owner, Min-ji, from a one-truck electrical shop into a company with steady municipal and industrial contracts. The agreed purchase price sat in the high end of a transaction around $15 million to $30 million, funded through a mix of the acquirer's own capital and a syndicated loan arranged with a commercial lender. Diligence went smoothly. Min-ji was ready to step back after twenty years, the crews were staying, and both sides wanted a clean, fast process.

Our team acted for the acquirer, negotiating and drafting the definitive share purchase agreement — the contract that sets out the price, the conditions both sides must satisfy before closing, and what happens if the deal does not close. One clause in that agreement, drafted almost as a formality at the time, ended up mattering more than anything else in the file.

Why the deal came apart

The share purchase agreement made closing conditional on several things, including the acquirer securing committed debt financing on terms no worse than what had been outlined at signing. That is a standard financing condition in a mid-market deal: the buyer is not obligated to close, and does not have to forfeit its deposit, if the financing it reasonably relied on does not materialize.

About seven weeks before the scheduled closing, the lender's credit committee reversed a preliminary approval after a portfolio-wide review tightened its lending criteria for the trades and construction sector. Linh spent two weeks trying to replace the facility with another lender, but nothing could be arranged on comparable terms before the outside date — the final date in the agreement by which closing had to happen or either side could walk away. The financing condition was not satisfied. The acquirer could not close.

This is where most collapsed deals turn into disputes. Min-ji had taken the business off the market for months, turned down at least one other inquiry, and incurred real costs preparing for a sale that was not going to happen. Without something in the agreement addressing that outcome, Min-ji's lawyers would have had grounds to argue for damages based on lost opportunity — the value of other deals not pursued, the cost of restarting a sale process, and potentially an argument that the acquirer should be held to specific performance, a court order forcing a party to complete a contract rather than pay money for breaching it. Specific performance is rarely granted in a straightforward commercial sale, but even the threat of that claim, paired with an open damages assessment, can tie up a deal team and a target company for a year or more while a court sorts out what the loss was actually worth.

That risk was already addressed, because the agreement had included a break fee.

What we did

1. Negotiated the break fee into the agreement at signing, not after. Months earlier, during negotiation of the definitive agreement, our team had pushed for a break fee — a fixed amount payable by the acquirer to the seller if the deal failed to close because a financing condition was not met, in exchange for the seller taking the business off the market during the exclusivity period. Min-ji's side had initially asked for a much higher figure tied to the full purchase price; we anchored the number instead to Min-ji's realistic re-marketing costs and lost time, landing on roughly $650,000. That number, agreed while both sides were still cooperating and had no dispute to fight about, became the entire remedy once the deal actually collapsed.
2. Confirmed the financing condition had genuinely failed before advising the client to walk away. A financing condition only protects a buyer if the buyer used reasonable efforts to secure financing on the agreed terms. We reviewed Linh's correspondence with the original lender and the two alternative lenders she had approached to confirm the acquirer had a documented record of good-faith effort, not simply a change of heart about the price. That record mattered because it meant the seller could not credibly argue the acquirer had engineered its own financing failure to escape the deal cheaply.
3. Sent formal notice of non-satisfaction of the financing condition before the outside date passed. The agreement required written notice within a set window if a condition could not be met. Missing that notice risked forfeiting the right to rely on the break fee mechanism at all and being treated instead as simply refusing to close. We delivered the notice promptly, in the form the agreement required, preserving the acquirer's position.
4. Negotiated the release and payment terms directly with Min-ji's counsel. Rather than let the collapse turn adversarial, we opened a direct conversation about paying the break fee promptly in exchange for a full mutual release — both sides agreeing not to pursue each other over the failed deal. Min-ji's lawyers pushed to add interest and reimbursement of their own legal costs on top of the fee. We held the line that the fee was already the agreed, complete remedy under the contract, and that reopening its scope now would only delay payment Min-ji clearly wanted quickly.
5. Structured payment to close the file within weeks, not months. The break fee was paid from the acquirer's own funds within about three weeks of the notice, and a mutual release was signed the same day. That single payment ended the matter — no litigation, no ongoing exposure, no reopened negotiation over damages.

The outcome

This was a real loss, and it should be described as one. The acquisition group spent months of diligence work, legal fees on both sides, and internal deal-team time on a transaction that never closed, and it paid roughly $650,000 for the privilege of walking away. Min-ji lost months of a planned retirement timeline and had to restart a sale process from scratch. Neither side got what they wanted going into the year.

What the break fee did was convert an open-ended, unpredictable dispute into a known, bounded cost. Without it, the realistic alternative was a claim from Min-ji's side seeking damages that could plausibly have run into the low millions once lost-opportunity arguments and legal costs were added up, litigated in the Superior Court over a year or more, with an acquisition team that needed to be closing its next deal instead of defending its last one. Roughly $650,000, paid within weeks and resolved with a clean release, was the difference between a bad quarter and a bad year.

The relationship also survived in a form that mattered to the acquirer's business. Min-ji's lawyers noted, in winding up the file, that the straightforward way the acquirer had handled the collapse — prompt notice, no games over the financing condition, quick payment — was part of why Min-ji was willing to reopen conversations eighteen months later when the acquisition group circled back with a revised, all-cash offer that did not depend on external financing at all. That second attempt is a separate story, but it would not have been on the table if the first collapse had turned into a lawsuit.

What you can learn from this