Re-trading, as we’re discussing here, is the fairly common practice of a buyer renegotiating the purchase price of a company after agreeing on price and terms. This happens more often than you’d expect and is typically caused by one of the following: i) an inefficient sale process, ii) failure to disclose material information prior to the LOI, iii) or bad faith on the part of the buyer.
If you are selling your company you have managed the sale process effectively, efficiently and professionally, you should walk away and look elsewhere for an alternative buyer. Unfortunately it’s not quite this simple, but walking away from the deal should be your first instinct.
Likely causes of re-trading
1) Inefficient sale process.
If you are managing an efficient sale process, you should have gone through a written indication of interest, preliminary due diligence, considerable financial analysis and negotiation on price and terms prior to executing a Letter of Intent (LOI). Oftentimes, a buyer will want to subvert this process, move quickly to an LOI and lock down a period of exclusivity to work the deal and get to closing. The earlier in the process that the LOI is signed, the less value it has to the sale process.
Both buyers and sellers can be too quick to create a flimsy LOI that isn’t close to a final deal. If you have an effective sale process, there should be multiple prospective buyers competing to execute an LOI. Even if there is only one buyer, the seller should conduct all negotiations on price and terms in a simple term sheet before papering up the LOI. If the buyer wants to re-trade after all the disclosure and negotiations that went into drafting the LOI, then you should walk away, terminate the LOI in writing and send a clear signal that you are not at the mercy of the buyer.
In our experience, those buyers that have a history of re-trading are unlikely to get the deal closed unless the seller submits to their revised terms. This is unacceptable in most cases and you should take the time to re-market the business.
2) Non-disclosure of material information.
This goes in line with the previous point. It is up to the seller to give the buyer an opportunity to make a fully informed offer when proposing an LOI. If you don’t have time to cure business issues prior to a sale, then these business issues should be disclosed early in the process, before negotiations take place on price and terms.
3) Bad faith of the buyer.
In many instances, and particularly common in a proprietary process with only one prospective buyer, the buyer many intentionally make an offer at the top end of the valuation range they’d consider, with the intent to use the due diligence process to reduce their offer, change the terms and renegotiate after the LOI. The seller does have some control over this. While it may seem counterintuitive to closing a deal, it often helps to delay the submission of an LOI until after preliminary due diligence and in-depth financial and business analysis by the buyer. It would be normal to first seek a written expression or indication of interest prior to this step, as well as use the process to discuss and negotiate a term sheet, but you should refrain from executing an LOI and offering exclusive rights to negotiate until you’re further down the process. Some buyers will rely upon the seller becoming fatigued and making considerable concessions late in the process, for fear that the buyer may walk away, which typically only happens after executing an LOI.
Every situation is unique, but we would encourage every seller of a business to establish and maintain a position of strength and resolution throughout the process; whereby you are willing to negotiate, but only at the right time in the process and only within reasonable limits. Put yourself in control and know that there are always other buyers. Hard work is rewarded more in a business sale than almost any other contract that a business seller negotiates.
Link to another blog by the same author: When should you sign a Letter of Intent – Business Buyer vs. Business Seller?