How to negotiate purchase price and deal terms post LOI?

July 29, 2021
by a searcher in Berkeley, CA, USA
Fellow searchers, I am under LOI and have uncovered issues during due diligence that imply a purchase price adjustment as well as changes in some deal terms like seller note to mitigate risks that were not known prior to the LOI.
I have been sharing the pieces of data that I discovered along the way to prepare them for what is coming and it is now time to start speaking about the terms.
I would appreciate any tips/suggestions on how to present the changes.
Thank you!
from University of Pennsylvania in Charlotte, NC, USA
The desire to avoid wasting your time with a seller who is not committed to selling is understandable. We establish the seller's commitment and reasonableness as we proceed in preliminary due diligence, indication of interest, management meetings and especially in negotiating an LOI. This process requires significant owner time and resources, if the seller is serious. A seller granting exclusivity under an LOI and agreeing to an extensive, disruptive (and sometimes expensive) period of due diligence also is a strong indicator that the seller is not wasting the prospective buyer's time. We are clear with seller that our proposal is subject to satisfactory DD. We communicate our DD findings to seller (or seller's advisor) along the way if concerns arise. To the point of the OP's question, communication is essential and the deal terms including price and structure will need to be renegotiated if adverse DD findings make the transaction not feasible on the LOI terms. As to how to approach this discussion, it is usually best done with proposed alternative solutions that buyer would find acceptable to close.
from University of Oregon in Portland, OR, USA
The nuance here is, a well-drafted LOI will anticipate and factor in most issues, so you don't have to revisit it. Deal-size matters. Egos matter. The LOI does carry weight going into a deal, so you don't want to revisit an agreed upon LOI lightly. You could offend someone by putting the LOI back on the table. But if the deal terms need to change because of what you found and you may need to walk away anyway, then it may be worth the risk. Don't be afraid to upset protocol for a valid reason.
Bottomline, your attorney and the seller's attorney will need something to work off to make sure that your contract reflects the deal terms you worked out are reflected in the contracts documenting the deal. That's the LOI and your written correspondence. For best results, consider involving your attorney and your accountant in crafting your LOI and in your due diligence, at least at a high level.