In our last blog we talked about the tactic of “retrading” in negotiations, whereby typically buyers agree to a deal that they don’t really intend to go through with. Customarily, they drag out the due diligence process, strategically and deceptively, to wear down the seller to agree to concessions. Here are strategies that you can adopt to avoid getting trapped in a retrade:
• Avoid Long Exclusivity Periods – Don’t commit to exclusive negotiations and its correlate, the “no-shop rule”, for too long. Set date specific milestones for the end of the due diligence period, contract signing, closing date, “drop-dead” date and deposits forfeitability and set these for as short as possible. The more measurable time milestones you can set, the better. For a typical middle market deal, there is no reason for a due diligence to last beyond 90 days, with 60 days or less being more typical.
• Rawhide!!!– Remember the theme song of 60s TV program Rawhide –
Keep movin’, movin’, movin’,
Though they’re disapprovin’,
Keep them doggies movin’ Rawhide!
Don’t try to understand ’em,
Just rope and throw and grab ’em,Move ’em on, head ’em up,
Head ’em up, move ’em out,
Move ’em on, head ’em out Rawhide!
Set ’em out, ride ’em in
Ride ’em in, let ’em out,
Cut ’em out, ride ’em in Rawhide.Rollin’, rollin’, rollin’
Rollin’, rollin’, rollin’
Rollin’, rollin’, rollin’
Rollin’, rollin’, rollin’
Rawhide!
Keep movin’, movin’, movin’,
Though they’re disapprovin’,
Keep them doggies movin’ Rawhide!
Don’t try to understand ’em,
Just rope and throw and grab ’em,Move ’em on, head ’em up,
Head ’em up, move ’em out,
Move ’em on, head ’em out Rawhide!
Set ’em out, ride ’em in
Ride ’em in, let ’em out,
Cut ’em out, ride ’em in Rawhide.Rollin’, rollin’, rollin’
Rollin’, rollin’, rollin’
Rollin’, rollin’, rollin’
Rollin’, rollin’, rollin’
Rawhide!
In a deal, you have to keep those doggies rolling. The deal must move forward relentlessly. Any delays work in the buyers’ favor as the negotiating position of the seller is weakened because he is overcommitted to the deal. Don’t let the deal ever idle. All impasses need to be resolved quickly. A deal is either moving ahead, or it is cratering.
• Keep Other Buyers Warm – Don’t kiss off losing bidders entirely. While you will be restricted in your communications with them in respect of solicitations, you generally can let them know what is happening without breaching the “no-shop” provision. In fact, you should insist that you should be able to inform the other potential buyers about the status of the process, without overtly inducing them to rebid. Ideally, try to insist on being able to talk to a “back-up” buyer, but usually the winning bidder is not going to acquiesce to that. You can try.
• Don’t Leave Controversial Issues for Later – Any issues that could have an impact on the selling should be dealt with as early as possible, not at the closing table. If the issue is important and can have an impact on the economics of the transaction, you might as well know up front how that is calculated so as seller you can decide if that adjusted pricing is acceptable.
• Check Out Buyer’s Acquisition History – Most buyers have a track record that you need to investigate. If the buyer has a history of retrading, caveat emptor. You can continue with this buyer, but you will strategize and act smartly to avoid being a victim of this gambit. This is where having a Mergers and Acquisition Advisor could be very helpful.
• Set a Fixed Price Not a Formulaic One – Formulaic prices such as a certain multiple of EBITDA generally work in the buyers’ favor. The reason is any diminution of EBITA as closing is approached hurts the seller. The very act of selling a company causes internal disruption and it is very likely that business suffers somewhat during this uncertain and anxiety producing period. This is because of the growing insecurity employees experience once they find out the company is for sale; they start polishing up their resumes, looking for jobs, jockey for more security, ask for bonuses and act out in destructive ways. So therefore, if the business is priced by updating formula as a function of the trailing twelve months immediately before closing, the seller is likely to get short changed by a short-term atypical and non-recurring drop in company performance. The seller is better off setting a fixed price and both buyer and seller take the risk of income going up or down.
• Be Ready to Walk – There is old deal adage that the best deals are those they walked away from. The buyer has to know in their gut that they will walk if a retrade is tried. Similarly, the seller has to know in their gut, that they are ready to walk away and go back to running their business. Another benefit from walking away, is that the seller can fix the problems revealed by the buyer and to put the company back on the market later, fixed, improved and at a higher price.