Lowered Price Post LOI

intern profile

January 24, 2023

by an member from The Citadel - The Citadel School of Business in New York, NY, USA

Interested to get a view on how sellers have responded to a lower price vs. what was offered in the LOI. I've rarely seen in industrial M&A the offer price increased in R2 vs. R1 (usually the price is lowered during diligence). Any one able share experiences where they provided justification and the seller agreed and ultimately lowered the price?

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Reply by a searcher
from Rutgers, The State University of New Jersey in Tampa, FL, USA
How much of a lowered price? In my experience, justification was warranted after 1) quality of earnings uncovered previously undisclosed negative impacts such as incorrect P&L, balance sheet, factoring/debt, etc., 2) customer contracts committed versus uncommitted revenue, 3) discrepancies (30% or higher) in inspected sales pipeline provided by management versus inspected.
These are just a few items that have caused enterprise value to be adjusted. It’s usually tough for the seller to appreciate the impacts of the above. Don’t get emotional about the deal, the numbers either make sense, or they don’t. In my experience, I’ve negotiated an earn-out (a way for the seller to re-coup EV) based on growth/GP that essentially protects the downside and enables the seller to feel comfortable with the EV/structure.
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Reply by an intermediary
from University of Wisconsin in Lawrence, KS, USA
It is quite common. We try to prepare out sell side client ahead of this, ie don't be surprise if, after a Q of E, they will try to negotiate a modified deal. It really all depends on what the basis for the deal is and whether or not that basis was proven to not be accurate upon post LOI due diligence. If that is the case, you can't blame the buyer, but if that is not the case, it is just a cramp down and you should stand firm for your client or terminate. There is no right or wrong in such situations, so we just use that acid test to make a decision.
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