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February 14, 2023
In the M&A world, there are few terms as dreaded as the “Re-Trade”. The continued market uncertainty, coupled with increased buyer scrutiny and diligence, likely increases the possibility of ‘re-trades’ for the coming year. However, proactive business owners can mitigate this risk.
The most critical stage of any M&A process is the point at which the seller selects the ultimate buyer / investor by executing a letter of intent (“LOI”) and agrees to provide ‘exclusivity’, prohibiting them from talking to other bidders. While it is each party’s stated intention (not obligation) to close the deal exactly following the terms outlined in the LOI, it is important to note that the LOI, by definition, is non-binding and subject to further due diligence.
A re-trade happens when the buyer lowers the valuation and/or changes the structure. Reactions to the re-trade depend upon one’s perspective:
Both sides think they are right…and they may be.
Justifiable: There is no such thing as a ‘good surprise.’ In today’s M&A market, the buyer due diligence process is becoming increasingly exhaustive and lengthy. When this detailed and disciplined process reveals something unexpected (a ‘surprise’), buyers will try to use this new information to renegotiate the terms, price and structure. Generally, justifiable ‘surprises’ come from:
Bait & Switch: While issues may surface during the diligence process that justify a revised offer, re-trades can also be part of a buyer’s negotiating strategy: give the seller what they want in order to get exclusivity, then trade down to a lower price using ‘new’ information based on their due diligence. This strategy is especially effective with inexperienced and/or over-zealous sellers.
Regardless of strategy, the re-trade usually comes at the worst possible time… right before the closing when there are limited options for the seller.
There are a number of steps sellers should take to help protect against a re-trade. Overall, sellers should be realistic and look at the company through the investor lens.
Re-trades are dreaded, but they happen. Even with a revised offer, the seller have options:
Unfortunately, CMG has plenty of experience managing re-trades. We suggest taking a deep breath and take an analytical approach to this emotion filled situation. Sellers should keep their focus on the ‘bigger picture’ and examine if a transaction still meets the objectives that that prompted a transaction in the first place.
About Carter Morse & Goodrich
Located in Southport, Connecticut, Carter Morse & Goodrich is a boutique M&A advisory firm that specializes in representing founder-led and family-held businesses valued between $20 million and $250 million. While CMG provides a full range of investment banking services, our primary focus is representing owners who are pursuing their once-in-a-lifetime M&A transactions. CMG specializes in advising leading companies in niche markets to plan, prepare, execute, and close successful transactions that maximize shareholder value. CMG fully understands and appreciates the unique dynamics of closely-held businesses and the importance of owner legacies. For 35 years, the combination of our hands-on approach, senior banker attention, strategic guidance, seamless transaction execution and extensive network of domestic and international resources has enabled us to become a trusted advisor to hundreds of business owners.
CMG's Broker/Dealer affiliate, Carter Capital Corporation, is a FINRA member firm registered with the SEC and SIPC.
About Carter Morse & Goodrich
Located in Southport, Connecticut, Carter Morse & Goodrich is a boutique M&A advisory firm that specializes in representing founder-led and family-held businesses valued between $25 million and $250 million. While CMG provides a full range of investment banking services, our primary focus is representing owners who are pursuing their once-in-a-lifetime M&A transactions. CMG specializes in advising leading companies in niche markets to plan, prepare, execute, and close successful transactions that maximize shareholder value. CMG fully understands and appreciates the unique dynamics of closely-held businesses and the importance of owner legacies. For 35 years, the combination of our hands-on approach, senior banker attention, strategic guidance, seamless transaction execution and extensive network of domestic and international resources has enabled us to become a trusted advisor to hundreds of business owners.
CMG's Broker/Dealer affiliate, Carter Capital Corporation, is a FINRA member firm registered with the SEC and SIPC.
For more than three decades, Carter Morse & Goodrich has excelled at maximizing shareholder value for our clients and leading transactions through to successful completion.
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