Guarding Against Retrades During a Business Sale
Retrades (buyer-initiated changes to price or deal terms after an LOI is signed) are a common, often legitimate part of the M&A process, not necessarily a sign of bad faith. Because LOIs bind parties together without locking in price, sellers lose leverage once exclusivity begins.
The best defense is twofold: thorough pre-sale preparation to eliminate weak points buyers could exploit, and process discipline to respond quickly and keep deals moving. When a retrade does happen, sellers should assess whether it's a legitimate, data-backed concern (concede narrowly) or a bad-faith tactic (hold firm, and be prepared to walk).Here’s a scenario I’ve seen play out many times.
A seller signs a letter of intent (LOI) and enters into an exclusivity period with a buyer. The buyer then begins due diligence by digging into the seller’s financials and operations. The seller fields dozens of questions from the buyer’s team, but is feeling pretty confident that all is proceeding well.
Then the buyer finds something the seller can’t explain away (in many cases what is found is news to the seller as well – terms in a contract, SALT issues, etc) and requests a downward adjustment to the purchase price.
This almost always throws the seller for a loop, bringing up a list of unwelcome questions: “What happened to the agreed-upon price?” “How is this possible at this point in the process?” “What can I and should I do now?”
And then, as the seller is trying to figure out how to manage the change, the buyer finds something else, and suddenly there are alterations to the structure of the deal.
This might sound like an obscure horror story, but retrades are common features of the deal process. In most cases, they’re not evidence of bad faith on the part of the buyer, but sellers caught unaware can misinterpret the situation.
So, what are the mechanics of retrades, and why are they possible once you’ve signed an LOI? Most importantly, how can you defend against them and secure the deal you hoped for, not the deal you settle for?
What is a retrade?
Any post-LOI change that reduces what the seller actually receives is considered a retrade. This can mean a cut to headline price or a change in terms that lowers initial proceeds in favor of a structure that holds some money back on closing day, to be paid out in the future.
Buyers typically justify retrades by claiming to have found something during due diligence that makes them rethink their initial offer. One of the most common justifications is a risk to revenue (e.g., from customer concentration, excessive owner involvement in daily business, or a non-transferrable customer contract). But market conditions can also change mid-process, making the deal less attractive for buyers or causing problems with their ability to finance a transaction at the LOI’s terms.
Why are retrades possible?
Like it or not, LOIs simply bind sellers and buyers to an exclusivity period, but don’t lock in the price or terms specified in an initial offer letter. That’s what allows retrades to happen. With exclusivity in force, the seller is negotiating with only one buyer and has sacrificed most of their leverage.
That might sound bad for sellers, but it’s simply the way mergers and acquisitions are done, and there’s no way around it. Other shifts might also favor the buyer, such as the seller’s increasingly emotional commitment to the deal (e.g., you might feel this buyer has a good cultural fit with your company) or the time and energy you’ve already sunk into keeping this deal afloat.
Because retrades LOIs aren’t legally binding of price or terms, there’s no legal recourse if a buyer decides to attempt a retrade. At heart, it’s simply a negotiation move.
Not every retrade is a sneaky tactic
Here’s what sellers usually don’t want to hear: a retrading buyer may have a point. Many retrades are legitimate responses to real problems:
- A company could fail to hit its financial budget during a process, putting its future performance in question
- Due diligence teams may reveal previously hidden risks in the business
- The market might experience an unexpected disruption (e.g., one of the key ingredients in a product’s formula spikes in price and affects that product’s projected profitability).
A minority of retrades are tactical in nature. Some buyers will bid higher than they’re intending to pay so they can win the exclusivity that an LOI brings, then start to grind away at the sale price with unreasonable asks.
The seller needs to judge whether each retrade attempt is proportionate to a real finding or simply an attempt to gain leverage dressed up as a legitimate grievance. Understand that time kills deals. The longer a process drags on, the greater the chances of business performance problems, new diligence findings, and market shifts—all of which can lead to demoralizing and possibly deal-sinking retrades.
How to prevent a retrade before it happens
There are two main ways to defend against retrade risk: preparation and process discipline.
- Preparation means taking time to address weak points in the months or years before your market debut. A retrade needs something real or plausible as a justification, and owners who have surfaced and handled their own problems leave little for the buyer to point to as a pretext. Engaging an M&A advisor such as an investment bank is a good way to discover these weak points and develop plans for fixing or positioning around them.
- Process discipline is the ability to respond quickly to every due diligence request and attempted alteration to the purchase agreement. Such discipline complements solid preparation; you and your deal team can defend LOI terms with well argued, data-backed answers. A disciplined approach will also help keep the deal moving, reducing the time window pre-close for unexpected issues to arise.
This is another area where an M&A advisor can be invaluable: experienced teams have seen everything before and can offer solutions to each curveball the buyer throws, including attempted retrades. Your advisor can help enforce a tight exclusivity window and credibly threaten to reopen a competitive bidder auction if a buyer overreaches.
How to Respond to a Retrade Request
When a buyer requests a retrade, work with your deal team to assess the justification before deciding how to respond. Use this framework:
| Situation | What It Means | How to Respond |
|---|---|---|
| Legitimate finding, data-backed | The buyer uncovers a real issue during due diligence that you agree with | Concede the specific point, and nothing more |
| Minor legitimate finding | The issue is real but limited in scope or impact | Counter with a smaller price reduction, or argue it doesn't justify a change in terms |
| Market shift | Conditions change after the LOI is signed (e.g., input costs increase) | Narrowly acknowledge the buyer's concern while holding to your original LOI terms as much as possible |
| Bad-faith tactic | The buyer uses minor or manufactured issues to grind down the price after winning exclusivity | Hold firm; consider signaling you're prepared to return to the market once exclusivity expires |
Regarding bad-faith retrades, be genuinely willing to walk away if you threaten to do so. This would cause your deal to fall through, but you can re-enter the market after exclusivity expires. I’ve seen instances where a seller gets a satisfactory outcome the second time around.
A retrade doesn’t have to be the end
Though I counsel deep preparation before selling a business, a buyer may still find something that’s not to their liking (or a risk they didn’t anticipate), and there are eventualities that you can’t prepare for. That’s why retrades are an unfortunate feature of some deals, even deals that conclude well for the seller.
The fact is that well-prepared sellers enter processes with less chance for surprises and more flexibility when confronting whatever comes up. Preparation, combined with the process discipline that an M&A advisor can bring, are your keys to stopping retrade conversations before they start and to negotiating from a position of strength if you must.
AUTHORED BY:
Zack Gibson | Managing Director | Class VI Securities, LLC
Zack joined Class VI in 2008 and currently holds the position of Managing Director. Zack’s primary responsibilities include leading Class VI ‘s investment banking division in executing and closing transactions involving the sale or financing of mid-market clients across a broad range of industries. He oversees pre-market preparation, financial modeling, creation of company marketing materials, client management and transaction negotiation.