The Art of the Retrade: How to Raise a Price Reduction Post-LOI

M&A Monday: The Art of the Retrade

Each Monday (give or take a day or two), I post one lesson buyers or sellers of a business should know. I learned these tips representing top private equity groups and working with the best M&A lawyers in the world.

There comes a time in every buyer's life when they consider a price reduction post-signing an LOI. This is extremely sensitive and must be handled with great care. How a buyer handles a retrade will determine whether a deal dies or moves forward:

Here are 4 things to know about a retrade:

1. Don’t retrade. Think long and hard before retrading. Retrading can impact your reputation and jeopardize the goodwill required to get deals closed. However, if there is a real need for a price adjustment, continue to the next three points.

2. Direct communication and collaboration. A purchase price reduction discussion should be between the buyer and seller directly. It is easier to have your lawyer do this, but important that this conversation be direct and honest. Take a posture of collaboration. I have a mentor who says, “How do we get to the right answer?” That should be the question. How to get to the most equitable result, together.

3. Point to hard evidence. It is critical that any price adjustment be supported by hard evidence. This could be results of Quality of Earnings and financial diligence or financial statements not as rosy as the CIM projected. This needs to be something that changed from when buyer entered into the LOI. This hard evidence should be written down in a clear list and sent to seller prior to having a retrade discussion.

4. Blame someone else. Buyer must retain goodwill and good faith throughout the transaction. Buyer and seller will often work together after closing, and deals run on goodwill. When goodwill turns into resentment, we start fighting over minor issues, and those deals rarely close. Thus, it is best to blame someone else. Blame the banker and point to an appraisal (they are the best to blame), equity investors, accountants doing diligence, or your lawyer. As a buyer, you are the good guy, let someone else be the bad guy.

5. Soften the blow. You are asking for a price adjustment. That’s tough and unpleasant. No two ways about it. You have to soften the blow so seller can save face. This is deal-specific (and should be brainstormed with your lawyer). Some examples are: (a) reduce your indemnification escrow, (b) decrease the working capital peg, (c) sweeten terms on a seller promissory note, (d) increase the seller’s post-closing consulting free, or (e) add an earn-out or increase the earn-out.

Retrading is difficult and sensitive. It can be done, but has to be handled collaboratively and with care. By addressing retrades collaboratively and in these ways, you increase your chance of achieving the right result while maintaining critical goodwill.

As always, DM me with any questions.

Eli