Data on how much PE discounts their original offer during due diligence?

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November 06, 2023

by a searcher from Northwestern University - Kellogg School of Management in Fort Lauderdale, FL, USA

I'm trying to make the case to sellers that they will get much higher offers from "big PE", but that by the time they close that number will be much smaller. They find ways to discount their offer. Has anyone seen any studies that align with that claim?

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Reply by a searcher
from Indiana University, Bloomington/Indianapolis in Houston, TX, USA
I think it highly depends on the quality of the business. A lot of LMM businesses tend to inflate EBITDA, so after a PE firm does a QoE, they find that EBITDA is overstated and adjust their offers. However, "big PE" doesn't typically go for LMM businesses, but the same can hold true with larger companies.

For deals that go to market and have a competitive bidding process, i've actually seen PE firms raise their bid on multiple occasions after they were invormed that the offer price in their LOI was not good enough to go exclusive. I've seen this twice, and on both ocassions the PE firms held firm on the offer stated in their LOI.

I do think that PE firms are weary of purposefully discounting their offer after having gone exclusive, unless they have reason to do so. The investment world is a small world, and if PE firms create a reputation for lowering their offer for reasons unjustified, then bankers will no longer include them in their bidding processes.

Unfortunately I do not have any data on this, but i think it largely boils down to the quality of the business. Poor managed businesses usually have more items uncovered during DD than well oiled machines.
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Reply by a searcher
from University of Pennsylvania in Charlotte, NC, USA
Agree with the majority of comments above. Legitimate revisions can occur, regardless of buyer type. But on an experience base of over 100 closed LMM deals as an advisor, we very seldom see aggressive or unwarranted retrading. PE firms are in the business of doing deals - not one, but many. They're aware that word gets around. Bad apple buyers get excluded from opportunities, the ethical competitors naturally have unfavorable things to say about them, the tactic is more likely to blow up a deal than achieve a lower price, and so on. Bad faith isn't a sustainable PE firm model. In fact, we've heard LMM PE firms that are competing against searchers, unfunded sponsors, etc. position themselves as more "reliable" and "accountable" ... since they need to keep a good reputation to get the next deal (and one-time searchers don't.)

On the point above, it's always the case that an LOI valuation is subject to due diligence, whether stated or not. And the "equity adjustments" mentioned are not reductions of the offer. Normally, the LOI states a cash-free debt-free basis for valuation, includes a provision for a NWC adjustment, and states what's being acquired - all standard.
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