Imagine this… You had several good proposals to buy your business and narrowed it down to the best one. You’re ready to sign an LOI and start the diligence process. But, how can you be sure they won’t change their price?
The situation is risky. Before the LOI, you hold the power. You have other options on the table and have controlled the process. But, after the LOI is signed, your power declines. You enter an exclusive relationship, other options must go to the sidelines, and you can’t go back to them later as “damaged goods”. During the diligence period, every detail about your company will be on the table, nothing is held back. Your choice of buyers is critical.
A retrade happens when the buyer changes the deal after signing the LOI. Some retrades are for good reason – the situation changed, diligence found some previously unknown issues, or the business declined. But, in other cases, a buyer will retrade the deal as part of a bait and switch strategy, or just because they think they can.
How can you avoid a retrade? Here are a some strategies to use before signing an LOI.
Know Your Buyers
Get to know the buyers before making a commitment. Find out if they have a reputation for retrading. Talk to former owners of business they’ve purchased in the past to see if they stood by their word. Inquire through other M&A professionals to learn any experiences with those buyers.
Know What the Buyer Knows
Before accepting an LOI from a buyer, determine what information they used to draft their LOI. Have they reviewed all the information that you sent to them? Have they asked good questions? Do they truly understand your business? How much effort have they put into the process so far? These answers can make a big difference about how solid is their LOI.
Pre-Diligence is Key
Most retrades occur because something was discovered in the diligence process that lowered the perceived value. One way to avoid this it to “pre-diligence” the company. Before signing the LOI, ask the buyer for their diligence list and provide data and reports to them, all under the Confidentiality Agreement. Expose every detail and discuss the results. Then, ask for a refreshed LOI, confirming the price and deal structure. Through this process, you will eliminate most reasons for a retrade.
Seller’s Diligence
A more aggressive approach is to conduct Due Diligence on yourself. Before starting the marketing process, hire a recognized accounting firm to do a Quality of Earnings report on your own company. Most buyers will appreciate this level of credibility and often accept, or simply refresh the report in diligence, which may speed up the process. In any case, the warts are already exposed, which adds to the credibility of the LOI.
With some good work, you can generate high-quality offers from very credible buyers. When the time comes to sign an LOI, you can do it with confidence that you can close the transaction on those terms.
Posted by Dan Vermeire.