An unwritten rule in the world of mergers and acquisitions is that you don’t deviate from the terms that are agreed upon in the letter of intent or term sheet. While letters of intent are typically non-binding, they do represent the mutually agreed upon material deal terms, and presumably, at least one of the parties would not move forward with the transaction outside of those terms. When a party renegotiates a deal term that has been previously agreed upon, it is commonly referred to as a “retrade.”
Why do retrades happen? What are your options when you find yourself on the other side of one?
There are a few common reasons that buyers will retrade material deal terms. The first is when something is found in legal due diligence that results in a material reduction to the buyer’s valuation of the acquisition target. Usually, these types of due diligence findings involve issues like highly unfavorable contract terms with a key customer or vendor. A second common justification is that the results of financial due diligence reveal that the buyer’s valuation was based on faulty assumptions. In addition, broader economic conditions can cause a buyer to seek to renegotiate previously agreed upon terms, or if a buyer experiences difficulties with obtaining debt or equity financing for the transaction.
A seller that finds itself on the wrong side of a retrade generally has three options: 1) They can accept the proposed changes, 2) attempt to negotiate with the buyer so that the overall deal terms remain acceptable, or 3) walk away from the transaction. That leads to another issue; the right time to walk away from a deal.
Deciding to terminate the transaction process is a difficult decision to make. Usually, the parties have expended considerable time and resources (including money) with the expectation that the transaction will ultimately close. If there has been a change in deal terms (or for buyers, if due diligence reveals significant red flags) it is important to avoid the sunk cost fallacy. It is also important for both buyers and sellers to be aware of their minimum acceptable terms, and to be ready to make a hard decision if those terms will not be met.
M&A transactions can involve a challenging process that may include twists and turns, and unexpected hurdles to overcome. Our team at Doida Crow Legal is highly experienced, and has helped both buyers and sellers navigate a number of hurdles involving changes in terms, due diligence matters, and in some instances, decisions to terminate the deal process. For a consultation, reach out to us by email at email@example.com or call (720) 306-1001.