When and How to re-nogiate a deal?

April 25, 2023

by a searcher from Brigham Young University in Provo, UT, USA

Understandably, a CIM generally paints any company in the most positive light, with any skeletons neatly tucked away in the closets. I'm not accusing brokers/owners of any impropriety, just the way this goes.

Inevitably, diligence may/should uncover issues that need to be considered. In the case that these issues become material factors in the deal, how have you addressed with the Seller? And probably more specifically, when have you addressed them?

On one hand, it would save time/money to address (and possibly renegotiate) an issue as soon as it becomes known.

"Woah, [this new thing] changes my view of the company quite a bit, I would need to change the terms [in this particular way] in order to continue feeling comfortable moving forward. And by the way, there's still more diligence to be had and we may need to address any other items that come up in the future."

On the other hand, if there end up being a few different issues, it may make sense to wait to have a clear picture of the entire business:

"...Throughout the diligence process I've developed a clearer understanding of your company. When I submitted my offer, I wasn't aware of [A], [B], and [C]. They represent certain risks that I think we could address via the following adjustment to the deal terms..."

Obvious challenges with both approaches, wondering what has worked best for you? Keep in mind, I'm not implying a strategy or tactic to simply lower the purchase price after entering LOI. Assuming there are genuine new reasons for concern, not enough to kill the deal though, and negotiating in good faith.

Reply by an investor
from University of Pennsylvania in Charlotte, NC, USA

Ryan, It's a great question and probably 5 different people will have 6 different opinions on the subject. From personal experience on both sides of the table, I'd recommend complete candor - in response to the "how" - and as to when, as soon as a term-changing issue arises. Assuming good faith as you said, or simply building a trust relationship with the seller, there isn't much value to any party, in my opinion, in accumulating unresolved issues that each change your proposed/agreed-to deal terms. It might seem more efficient to bundle them and negotiate the whole package, but if the first issue you discover requires you to revise your offered terms, better to see if you come to a new agreement with seller before spending more time, energy and possibly money looking for additional issues. Generally, it doesn't feel good to the seller to learn that you discovered an issue on day 5 that causes you to reduce your valuation, then you proceeded to take up another 30 days of seller's time and resources anyway without giving a heads-up. The exception might be if your third-party QofE (or legal, or insurance, etc.) DD is underway, and the timeline to completing that is relatively short, maybe let that conclude and present all of your issues together that were uncovered in that process.

Reply by a searcher
from University of California, Berkeley in San Francisco, CA, USA

Two concepts: 1) Reps and warranties and 2) MAC (material adverse change) clause. First if historical or current CF is different than "represented", then naturally that affects price. If any material facts presented by the Seller to you is revealed in your DD as materially different from facts, then proposing a discount is fair. Second, if the market, industry or the Company has experienced "material adversed change" then the asset you agreed to purchase is now different. Therefore you should walk or find the right price given discovery. That said, its bad bedside manners to nickel and dime DD variance.

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