By Pascal Wittet, Partner at Orca Equity Partners
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Let me start with an uncomfortable truth: most search fund deals die in due diligence.
After weeks of courting a seller, burning through legal fees, and getting your accountants to perform forensic surgery on the books, something inevitably goes sideways. Maybe the trading softens and those robust margins start looking less robust. Maybe it’s the employment contracts that haven’t been updated since 1987. Maybe it’s the “minor litigation” that turns out to be slightly less minor than advertised. Or maybe it’s just death by a thousand cuts—none fatal individually, but collectively enough to make you walk away.
Here’s the kicker: the seller often knew about these issues all along. They just hoped you wouldn’t notice, or wouldn’t care, or would be in too deep to walk away.
This is where the abort cost share comes in. It’s a simple mechanism I’ve used in every PE deal I’ve executed, and it’s materially improved conversion rates. Recently, a French searcher duo successfully deployed it in their acquisition process, proving the concept travels well beyond UK borders.
What is it?
An abort cost share is exactly what it sounds like: if negotiations collapse for any reason, the buyer and seller split the reasonable due diligence costs 50:50, up to a capped amount.
Here’s the actual clause I use:
“You acknowledge that the Buyer will incur significant costs and expenses carrying out a due diligence investigation into the Company and negotiating the documents required to complete the Proposed Transaction (Deal Documents). Accordingly, if negotiations in relation to the Proposed Transaction cease for whatever reason, any reasonable third party due diligence costs, legal costs and associated expenses (including associated irrecoverable VAT) incurred by the Buyer as a result of their due diligence investigations into you or the Company (including in connection with the Deal Documents) shall be shared between the Buyer and the Company. The Company’s maximum costs under this clause shall not exceed [€60,000].”
Why does this work?
Because it introduces skin in the game—early.
When a seller knows they’re on the hook for half your DD costs if the deal falls apart, something magical happens: they start behaving like your partner rather than your adversary. Suddenly, that “minor” litigation issue gets disclosed upfront. Those questionable customer contracts get flagged before you waste time investigating them. The whole tone of the negotiation shifts from adversarial poker to collaborative problem-solving.
It’s not about punishing sellers. It’s about aligning incentives so everyone wants the same outcome: a deal that actually closes, with no nasty surprises lurking in the shadows.
The Dos and Don’ts
DO:
- Introduce it at the right moment: Bring it up after the main deal terms are agreed but before the LOI is signed. This is the sweet spot—there’s momentum, but no one’s legally committed yet.
- Get it countersigned: Include it in your LOI and ensure the seller countersigns. Without their signature, you have an interesting conversation piece, not an enforceable agreement.
- Cap it sensibly: €50-60k is usually reasonable for SME deals. Enough to matter, not enough to sink the business.
- Share your DD roadmap: Give the seller an outline of your likely DD costs and when you’ll incur them. Watch how quickly they become invested in keeping your legal fees down and expediting information requests.
- Keep it unconditional: No carve-outs, no “unless it’s your fault” clauses, no exclusivity period linkages. If the deal dies for any reason—price changes, financing falls through, you get cold feet, they get cold feet—costs are shared. Clean and simple.
- Use it to build trust: When a seller agrees to this, they’re signaling good faith. Reciprocate by being transparent about what you find.
DON’T:
- Don’t spring it on sellers late: If you wait until after DD has started, it looks like you’re trying to strong-arm them. This only works if introduced at the right time—after terms are agreed, before LOI is executed.
- Don’t add conditionality: The moment you start creating exceptions (“unless it’s because of financing” or “unless you fail to close by X date”), you’ve introduced complexity and killed enforceability. Parties will always find ways to game conditional clauses. Keep it absolute.
- Don’t use it as a threat: This isn’t a weapon—it’s a partnership tool. If you find yourself saying “remember, you’ll owe me money if this falls through,” you’ve already lost.
- Don’t make the cap unreasonable: A €200k cap on a €3M deal isn’t cost-sharing; it’s a poison pill. Be proportionate.
- Don’t skip legal review: Have your lawyer draft this properly. Copy-pasting my clause without context is a recipe for trouble.
The Real Magic
Here’s what I’ve found after using this mechanism repeatedly: the deals that proceed with an abort cost share in place are better deals. Not because the clause itself protects you (though it helps), but because sellers who agree to it are self-selecting for honesty and alignment.
A seller who balks at risk-sharing when you’re about to take on far more risk than they are? That’s a signal worth paying attention to.
The search fund journey is hard enough without adversarial negotiations making it harder. Tools like the abort cost share won’t magically fix broken deals, but they can help ensure that the deals you pursue are with partners who want to see you succeed—not just sellers trying to get out at any cost.
And at Orca, that’s what we’re all about: supporting searchers with practical tools and frameworks that make this challenging (and yes, sometimes lonely) journey a bit more enjoyable. Because acquiring a business should be exciting, not just exhausting.
Now, if you’ll excuse me, I need to explain to my wife why “abort cost share” keeps autocorrecting to “a boat cost share” in my phone. Though come to think of it, both involve significant cash outlays and the occasional sinking feeling.
