Mitigating and Avoiding the Proverbial and Dreaded Re-Trade

There are few things more frustrating for a business seller than having the price or terms of an attractive offer negatively revised at the eleventh hour or as the buyer completes their due diligence.  In the industry, we call it a “re-trade” and it can be a devastating blow to a seller’s morale: particularly when it happens after there has been a lot of time and effort put forth by both parties.  This blog article will discuss ways to mitigate the potential risk of a re-trade late in the sale process and outlines some buyer tactics that should be seen as a warning sign that a re-trade may be imminent.

Preparing for the sale
The most important thing an owner can do to reduce the chance a potential buyer will attempt to re-trade a good offer late in the process lies in being properly prepared. Despite each buyer viewing the business from their frame of reference, it is best to try to anticipate any potential issues before getting into negotiations.  This can be achieved by undertaking a thorough “seller’s due diligence” beforehand.

It is rare for a negotiating process to go smoothly from initial dialogue to closing and there are often lots of twists and turns as the buyer learns more about the business.  Nevertheless, having a comprehensive view of the business from a buyer’s perspective helps the seller properly anticipate the areas in which a buyer may have legitimate concerns.  These should be addressed with the potential buyer very early on in the discussions.  Holding on to critical information that a buyer legitimately needs or simply feeding them only the information as it is requested risks triggering a re-trade.

Of course, there are situations in which real risks are uncovered during the due diligence period, such as an environmental issue, or an improper accounting issue, that may warrant a re-trade when it would materially impact the business’ value.

Have clear insight on what is non-negotiable
Having clear insight into what is important to you upfront and articulating it to potential buyers early on also helps reduce the chance of a late-stage re-trade. If an all-cash deal is critical, make sure any potential buyer knows that.  If your role post-transaction or retaining key employees is important, make sure they understand your position.  This helps ensure they consider your non-negotiable terms in the context of any offer they provide.

Always have an alternate option
One of the advantages of working with an M&A Advisor and running a competitive process is that often there are secondary buyers that have submitted bids, or even LOIs that were good but maybe not the best.  Your advisor’s role is to keep these buyer candidates interested in the opportunity while under LOI exclusivity while ensuring that the lead candidate knows that other buyers are waiting in the wings.  This reduces their inclination to try to re-trade the deal, unless it is for a valid reason.

Being prepared to walk away from any negotiation is also a good option in many situations.

Ensure they have completed sufficient due diligence before you accept a “Letter of Intent (LOI)” and go exclusive
Often a buyer will provide a non-binding offering letter, outlining the major terms and price, or price range, that they anticipate paying and ask for an exclusive period to conduct their due diligence.  This is only a legitimate approach if they have done enough preliminary due diligence to have a very clear understanding of the business, its markets, customers, competition, employees, assets, etc.  There should be very few questions left for the buyer about the business and its operations after an LOI is agreed to.  Accepting a non-binding offer that does not include details on how much working capital is included, what assets are included/excluded, whether it is an offer for the company stock or its assets, what will happen to employees and management, etc., is an offer that is highly prone to be re-traded.  In other words, the LOI should outline all the major terms of all the definitive agreements, including the purchase and sale agreement, leases, working capital adjustments, employment agreements, non-competes, etc.

Once an LOI is agreed to, there should only be confirmatory due diligence left to complete. Confirmatory due diligence usually involves considerable investments by the buyer in hiring outside advisors to provide environmental assessments and/or legal/tax/financial due diligence, so it is legitimate for a buyer to ask for some time whereby they can get its required due diligence completed unfettered.

Keeping your eye on the business while negotiating
One of the most common reasons a buyer initiates a discussion to re-trade is because business performance falls short of expectations.  Owners that aggressively promote a business’s growth and then start having month-ends that fall short during the negotiation process are highly susceptible to a re-trade discussion.  No matter how much of a distraction the sale process can be, owners/managers need to stay highly focused on the business and its operations during the process.

Understand the buyer’s tactics
Unfortunately, some buyers intentionally use the re-trade as a tactic to close their deals on terms they deem favourable.  While unscrupulous, it works in some cases.  Sometimes a buyer will provide the seller a vague but highly attractive offer, get the deal locked in under an exclusivity period, and then as the seller fatigues and frustration sets in, they start with the “yeah buts”.  Yeah, but we didn’t think your margins on the XYZ product line would be that low.  Yeah, but we didn’t know that you had 20% of your sales coming from one customer.  The buyer hopes that the seller will be so far down the sale path that they will be more open to compromise.
In other cases, when a seller is using an M&A Advisor and running a competitive process, some buyers use an aggressive bid at the early stages of the process to gain an advantage by knocking out other legitimate buyers who have made more realistic bids. An experienced advisor will help you avoid this tactic.

Some warning signs that a re-trade tactic might be forthcoming, is if 1) the offer is good to be true, 2) the potential buyer has done very little due diligence before providing an offer, 3) they have a poor understanding of the business, or 4) in the case of direct seller to buyer negotiations, when the LOI is vague and short on specifics.

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