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!

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Reply by an investor
from University of Pennsylvania in Charlotte, NC, USA

Lots of good points made. ^redacted‌ - interesting approach. If I understand, your "Acquisition Offer Termsheet" would require seller to consummate the transaction at 90% of the proposed purchase price, in the event that your DD suggests a lower price than you offered. However, you retain the option to terminate rather than close, regardless of DD findings. In my experience, this term would severely disadvantage you in a competitive process. Could you explain how you persuade sellers to grant exclusivity under such terms which are not present in competing proposals? I'm also wondering how the independent third party DD opinion would work. Would this DD opinion encompass legal and commercial DD? What would be the scope, even from an accounting/financial analysis perspective? .So many elements factoring into valuation/purchase price are not readily quantifiable (or at least there is no agreed-upon standard), are subjective, are unknowable assumptions about the future, and are almost entirely dependent on the facts and circumstances of a specific transaction. Even if such DD opinion supported your revised valuation and you attempted to force seller to close over his/her disagreement/objections, you have the entire purchase agreement to negotiate, and it seems unlikely that you and the seller would be able to agree on risk allocation and other critical terms having started from a place of disagreement on purchase price. We would see an adversarial closing with a hostile seller as a non-starter even if all of the above were successfully implemented and imposed, making the term impractical to begin with. But perhaps I'm missing some points about how you are able to do this successfully, and would much appreciate hearing your response

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.

Reply by a professional
from University of Oregon in Portland, OR, USA

If there are a lot of issues being uncovered that are going to affect what you will accept going into the Purchase Agreement and change deal terms in the LOI, consider proposing an amendment to the LOI, or a new one. One of the important functions of the LOI is as a framework to get your deal terms into a contract. If the LOI doesn't represent the deal you will accept and you need to change or add terms that will be part of the final contract, put it back on the table. Or, simply expand on it by hashing it out over email, or in a phone call with an email to follow up and memorialize the terms.

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.

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