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Renegotiation can occur in the time leading up to the closing of a business sale. While this can sometimes cause tension, if managed correctly, it can be simply one more milestone on the way to the successful conclusion of a deal.
When Does Renegotiation Occur?
There are four stages in the transaction that we see renegotiations:
- During or after due diligence.
- Between the LOI and Purchase Agreement.
- Pre-closing.
- Post-closing. This is less common, but can happen via earnouts or indemnification claims.
Why Does Renegotiation Occur?
Renegotiation can be classified as legitimate or opportunistic.
Legitimate renegotiation is often driven by financial discrepancies, expiring inventory, expiring customer contracts, hidden liabilities, litigation risks, regulatory issues, or key contract issues.
Opportunistic renegotiation can occur due to market shifts or financing issues.
What Does Renegotiation Involve?
Everything is on the table to be renegotiated:
- Purchase price and adjustments
- Deal structure (think addition or modification of seller financing or equity rollover)
- Risk allocation (holdbacks, additional representations and warranties)
- Tax and legal matters (asset vs stock sale, liabilities, etc.)
- Non-price terms (non-competes, transition period, closing conditions
When Is Renegotiation a Win/Win?
Buyers
Buyers should not just demand a cut in price. They should have numbers to back up their reasoning. When they do so, they can offer creative solutions to address their areas of concern. If, for example, some revenue is lower than expected in a given time period, a buyer might reduce some of the cash upfront, but offer that amount back through an earnout if the numbers come good again.
Buyers should also present these objections in stride, with a spirit of “moving forward” rather than implying that these are objections that will bring this process to a screeching halt.
Sellers
If properly prepared, sellers can reduce the chance of a renegotiation significantly:
- Have clean financials and current tax filings in hand
- Have a competitive process featuring multiple bidders
- Have walk-away milestones in place tied to minimum acceptable price after adjustments
- Accept a notion of total value: a focus on escrow, earnouts, and transition terms can preserve net proceeds
What Should Both Parties Keep in Mind in a Renegotiation?
Both buyers and sellers should:
- Stay as professional as possible. Don’t let emotions derail a deal
- Document communication whenever possible
- Get help via key counselors like your accountant, advisor, attorney, etc.
Do you want someone in your corner in the sale of your business? Contact us so we can be there for you.