Lowered Price Post LOI

by an member from The Citadel - The Citadel School of Business

Jan 24,2023

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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professional from Villanova University

If your QoE can prove lower EBITDA than that presented by Seller, then a PP reduction equal to the EBITDA shortfall multiple by the implied multiple in your LOI is an intellectually honest approach...although Seller may not want to proceed at that point. That said, given strong arguments proving lower EBITDA, I have seen purchase price reductions or altogether new LOIs/restructuring the deal in some sort. -Dave

02/01/2023 | like reply | 0 likes

searcher from Rutgers, The State University of New Jersey - Camden

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.

01/24/2023 | like reply | 2 likes

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