In the mergers and acquisitions world, retrade is an ugly word. It refers to any unanticipated adverse modification to the previously agreed to terms and conditions of a transaction, most frequently in the purchase price. While not as common as in the past, such actions by buyers definitely do occur and they not only aggravate sellers, but also can jeopardize the closing of a deal.
There are times when buyers are justified in seeking an adjustment, as in the case of a discovery that certain deal fundamentals are not supportable under the scrutiny of the buyer’s due diligence. For example, a client of ours discovered that its target (which lacked a sophisticated financial staff) was unaware of its true profit margins, with some significant customers actually selling at negative margins. To its credit, when the seller was faced with this issue, it agreed that an adjustment to the pricing was necessary and appropriate.
Other times, however, buyers may seek to utilize perceived leverage in a transaction to drive the letter of intent (LOI) price down, hiding behind whatever diligence facts it can muster. In past cycles, this was, in fact, a much more common practice.
Years ago, a distressed client of ours negotiated a significant transaction with one of the largest private equity groups in the country for an attractive price. Shortly before the closing, the potential buyer delivered a detailed letter, citing numerous issues it had identified in due diligence and assigning a dollar value to each one. The claims totaled nearly 20% of the original purchase price.
Fortunately, the group’s reputation had preceded it and our client was ready to respond. It was able to dispense with many of the “issues” as being basic business risk or by providing supplementary information to alleviate the concern. The deal moved forward and closed with a price adjustment that was far more modest than the proposed downgrade, yet still acceptable to seller.
If you are thinking about bringing your business to market soon, there are things you can do to prevent facing this unpleasant predicament:
Be prepared, be very prepared. The fastest way to have the deal value decreased is to have an inadequate response to the buyer’s due diligence request. Problems always arise in due diligence. Businesses that can proactively answer buyers’ questions present themselves as stronger operations and are in a better position to withstand an attempted retrade. To prepare properly, we strongly encourage clients anticipating going to market to have our firm conduct a mock diligence drill as though we were buyer’s counsel. This can identify issues and get them solved or mitigated before the buyer is even identified.
LOI protections. Another key area is drafting a very tight letter of intent. Provisions need to be included to make the buyer face a significant consequence, such as loss of exclusivity, if it even requests an adjustment. This should limit the request to only the most serious claims.
Be ready to walk away. It can be very hard, at the eleventh hour of a lengthy deal process, to turn your back on a significant payday, even if it is being reduced. If, however, the proceeds are not going to yield what you really must get out of the deal, you may need to walk away and begin again. If you are not in a position to do that, you may not be able to withstand the buyer’s challenge.
Thankfully, retrades are not part of every transaction, but prudent sellers need to be ready, willing and able to deal with them. Guided by strong counsel and a high-quality deal team, your business can be.
Originally published in Crain’s Cleveland Business
Cleveland business lawyer
