A company has expressed an interest in purchasing my one man startup. However, I've had this sort of interest in the past and nothing has come of it after quite lengthy negotiations. At the moment I can't really afford the time or legal fees. The buyer seems much more keen than I am to spend time on this. I'd like to know is it reasonable/legal to ask the potential buyer to pay the legal fees I incur during negotiations whether the deal goes through or not?
Be up-front. Make it clear that for the reasons you state, it would only make sense to develop the conversation if the prospective buyer covers your out-of-pocket expenses regardless of the outcome. If they are serious, you are giving them a fair choice. If they choose not to progress on those terms, you haven't shut the door to resuming the discussion at a later date.
Even better, add a break-up fee to the term sheet. A break-up fee requires the acquiror to pay you the fee if the deal doesn't go through.
The break-up fee should be high enough to cover all your expenses and also to compensate you for your time in the deal if it doesn't go through.