Hi

In today’s issue we’re going to be talking about an unpopular topic:

The dreaded price re-trading.

Shudder!

Price Retrading Has Been Demonized

“Never retrade on price” everyone says.

It’ll destroy trust and almost certainly kill your deal.

Right?

Only if you do it wrong.

Yes. If you do it wrong, you most certainly will offend the seller, destroy trust, and kill your deal.

But there is a way to do it right.

A way that will have the seller seeing things your way, and that might even get you a better deal than you ever thought was possible.

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In today’s issue, I’m going to show you a playbook for retrading right. It’s a simple 5-step process that I’ve successfully used to help many clients get past difficult price conversations.

Before I go into the specific steps, I want to lay the groundwork here by talking about deal psychology. Proper retrading is all about understanding and making the best of deal psychology and comes down to three critical principals:

1. Expectation management
2. Joint problem solving
3. Goal orientation

Finally, remember what the sell team is thinking at every juncture.

1. Worried about not closing - everytime they hear from you, they’re worried that there is a “new development” that will cause the deal to not close.
2. Wary of “bait and switch” - they’re also always on the lookout for the feared “bait and switch.” Too many of our friends from corporate M&A do this: they get a deal under LOI under certain general terms and then “beat the seller up” over price and terms.

This is what we are up against here, folks.

So with all of this in mind, here is my 5 step system for successful re-trading.

Obviously it’s still best not to have to retrade in the first place but oftentimes it’s unavoidable. When you need to retrade, my system will help you do so with minimal fuss, minimal angst, and maximum chances of not killing your deal.

Here are the steps:

Step 1: Lay the Groundwork in the LOI

This goes back to the idea of expectation management.

Lots of searchers state a definitive purchase price in their LOI without disclaimers.

Obviously this is based on preliminary financial and other data provided by the seller early on in the process which is often not very accurate.

But the problem with stating a price without disclaimers is that your seller will get fixated on it.

There’s a name for it in neuroscience: the Anchor Effect.

Once your seller expects a certain price, then anything less is a disappointment and can kill your deal no matter how logical the reasoning is for needing to adjust it.

The solution? Put a price disclaimer in the LOI.

I always put that in LOIs I draft. It reads something like “the purchase price has been proposed based on a multiple of SDE as derived from information provided in the CIM by Seller. If the SDE is determined to be materially different after financial due-diligence, then the purchase price is subject to revision accordingly.”

This way, you set realistic expectations early.

So if you need to retrade, the seller is already primed.

Step 2: Clearly Identify the Reason(s)

It probably goes without saying, but if you need to retrade on price, you’d better have a good reason.

Sometimes it’s that your financial diligence reveals lower than anticipated earnings.

Or maybe your SBA bank appraisal came in low.

Or some risks came up that should be baked into the price in the form of a lower multiple.

Whatever the reason, it’s critical that you clearly identify them, and, if possible, provide the seller with third-party proof of the reason.

This could be the appraisal report.

Or a summary page from your financial DD.

Transparency leads to trust.

And this is one juncture where you need to maintain the seller’s trust at all costs if you’re going to keep the deal alive.

Step 3: Correct Timing

Timing is everything.

This statement couldn’t be more true when it comes to presenting “bad news” in a deal.

And price retrading is the epitome of the dreaded “bad news conversation” from the seller’s perspective.

So, it’s critical that you share this news at the right time.

The right time is when you have some definitive news that will help the deal move forward. You want it to be a “good news/bad news” type of a situation. If all you have is the bad news of the price retrade without some good news to assure the seller that the deal still has legs, then it will likely bog down and die.

Types of good news you should consider pairing this with (which will shape your timing):

• Bank term sheet approval
• Completion of legal diligence (and an affirmative decision to move forward assuming you can get the price delta figured out)
• Completion of operational due diligence or significant milestones there

Step 4: Talk to the Right People

Another key success tip is to pick who to work with when retrading price.

DO NOT ever bring people who have no vested interest in closing the deal into the equation. The most obvious person I mean is seller’s attorney. Don’t let attorneys get involved in any way in the price negotiation process - especially retrades.

Instead, you want to either work directly with the seller or use the broker.

Here’s how to decide who.

If you have a great rapport with the seller and can genuinely say he or she wants to sell to you “because they like you” then I would work directly with them on the pricing issue. There are lots of positive dynamics going on and hopefully a price discussion won’t throw things off the rails.

Otherwise, especially if you have a good broker, I would recommend working with the broker. Not only is the broker heavily incentivized to sell the business (to earn their commission) but a good broker will have deep knowledge of the M&A process and market so should be able to coach the seller on the reasonableness of your price retrade proposal.

Step 5: Use “Joint Problem Solving” Approach

Finally, another technique I have helped clients use with great success is what I call the joint problem solving approach.

Here’s how it works.

1. Present the problem to the seller and couch it in terms of bad news brought to you by a third party. “The bank came back with a bad valuation.” or “My financial DD advisor came back with some negative news.
2. Strongly reassure the seller you’re still interested in buying - again as discussed in step 3, ideally with some “good news” to demonstrate your good faith.
3. Create an “us against them” dynamic with the seller and solicit their help in jointly solving your new problem.
4. Ideally ask the seller if they’ve got any ideas on how to fix the problem and move the deal forward.

You’d be surprised how well this works.

I’ve had deals where sellers just spontaneously offer up solutions such as and additional seller note or even significant reductions in price.

It’s ALWAYS better if the solution is proposed by the seller.

Bringing it all together

To sum it all up, retrading doesn’t have to be a one-way ticket to a broken deal.

Just remember the five steps in my price retrading playbook:

1. Lay the groundwork in the LOI
2. Clearly identify the reason(s)
3. Correct timing
4. Talk to the right people
5. Use “joint problem-solving” approach

I assure you that you will have much better luck with price-retrading and a smoother deal.

Best of luck on the search!

See you next issue.

Eric Hsu, M&A Lawyer

Editor, Freedom Through Acquisition Newsletter