What is Re-trade When Selling Your Business?
If you're a founder who has accepted a Letter of Intent (LOI) for your company, and you think the final price and terms are locked down, this video is for you... there might be a frustrating experience in your future.
Ever heard of a 'retrade'? It's a term you may find out about at exactly the wrong time and have it derail your plans for a successful sale. This is when a buyer finds some reason (internal or external) to change terms after the LOI. Happens a lot. Give us a few minutes and we'll save or make you $Millions! Maybe much more!!
Solutions to Retrade.
There are a few solutions to this frustrating dynamic, and depending on how far along, type of buyer, and other deal dynamics, these 3 minutes might save your deal or give you the confidence to walk away.
What is Retrade?
If you’re a founder and in the process of selling your company, and you haven’t heard the term Re-Trade yet, the first time will probably produce some heartburn. Or worse. Most founders have never been through a partial (recapitalization or recap) or full buyout, so they’re pretty surprised that after signing the letter of intent with their prospective buyer, the valuation of your business, and therefore the money you receive from your sale can change. And here’s a spoiler alert — it never increases!
It’s in your interest to have a transactional professional in your corner to prepare for and respond to this when it happens. Without a seasoned professional with years of experience and dozens or even hundreds of deals under their belt, this often kills deals or leaves owners with far less than they deserve when selling their business.
Here’s how it happens. You and the buyer co-sign the Letter of Intent (LOI) that spells out value (sometimes a range), proposed structure (cash, seller note, equity rollover, and earn-out payments) for the acquisition.
After the LOI is signed, Due Diligence begins, wherein the buyer seeks to validate what you (or your investment banker) have told them about the business, usually beginning with finances, then moving to operations, legal, HR, and through a formal checklist which when completed, will signal that your deal is in the home stretch subject to finalizing agreements and transferring cash and other consideration (structure) to you for your ownership.
Each of you has different incentives to complete due diligence thoughtfully, but that’s where the paths begin to diverge. For the buyer, it’s their opportunity to validate their hypothesis about your company, find hidden risks, and get to know more about how your business operates. And they’ll want to take their time; to be thorough, yes, but also because longer due diligence favors the buyer. They can ask more questions, learn more while your company is off the market under their exclusivity, and potentially wear you down through what’s referred to as “deal fatigue”. For you, due diligence will seem invasive and accusatory, will feel like it goes on forever, and the process will distract you and your core deal team from running the business as usual.
The Re-Trade happens when they come back to you with something they found in due diligence that causes or allows them to suggest that your adjusted EBITDA (Earnings Before Interest Taxes Depreciation and Amortization) is lower than reported, or that there’s something they’ve uncovered that they’ll assert are reasons for lowering the purchase price or changing terms.
If you’ve never been through the process before, this will either seem like a breach of contract or bad faith negotiating (the LOI is non-binding) or something you have to accept because the smart folks tell you your business is worth less. And neither one of those things is true. You have options.
This happens more commonly with Private Equity buyers. They’re not all bad and they’re not all the same, but Re-Trades happen much more commonly with them than with Strategic Buyers. Know that going in and have the conversation up front with your advisors and potential buyers.
Walk away from the deal. The LOI is non-binding, so you can end discussions with a bad buyer, and if rapport is lost and you can’t see working with the buyer after the Re-Trade, end the exclusivity and terminate the process.
Push back. Argue that the economics haven’t changed and support your contention with facts and data. You know your business better than anyone. Be willing to walk from the deal but stay open to working through the issue(s).
Don’t take it personally and recognize that sometimes it’s a tactic and other times it’s a sincere difference of viewpoint. Stay at the table and find agreement. Between willing buyer and seller, structure fixes most valuation issues, and the divide can usually be bridged.
If you don’t have a financial advisor or some sort of transactional professional in the mix, this can be really hard. It’s possible for you to DIY but recognize that your buyer has probably done this more times in the past year than you’ll do it in a lifetime. They’re full-time predators and you’re part-time prey. Arm yourself appropriately to protect your legacy.
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