The process of negotiating the sale of a company is notoriously challenging. And negotiations persist throughout the entire sale process — not just at the outset or the close of the deal. Items that need to be addressed and managed on both sides will arise over the course of the transaction as the seller makes disclosures about their company and the buyer identifies potential issues or areas of concern in the natural course of their diligence. On both sides of the negotiating table, there is give and take throughout the process until both the buyer and seller are mutually satisfied (or mutually dissatisfied as the case may be) with the outcome.

However, sellers should exercise caution when buyers start making unreasonable demands and requests. It is important for sellers to be willing to walk away at any point in the transaction — even at the 11th hour — if the potential buyer begins to pull what we like to call “dastardly buyer tricks.” These are unreasonable, and often extreme, demands that the buyer makes to gain an unfair advantage over the seller and that serve their best interests in the deal without regard for equity or etiquette.

In this two-part series, we will examine some of the dastardly buyer tricks some buyers try to employ during a sale process. In Part 1, we will look at five tricks buyers may use before entering into a Letter of Intent (“LOI”) with the seller:

  1. Consistently request extensions during a sale process. In a competitive sale process, the seller’s investment banker establishes a transaction timetable in order to keep all buyer candidates at a parallel point in the process. This includes requesting an Indication of Interest (“IOI”) by a certain date, inviting buyer candidates to a management presentation in a narrow window of time, and requesting a Letter of Intent (“LOI”) by a certain date. Some buyer candidates always seem to need an extension from the banker’s process because they cannot meet the established timetable. (In fairness, a buyer that entered the process late through no fault of their own may need a little time to catch up, but this should not extend beyond the IOI). So, it is important for the seller to ask: is the consistent request for an extension a function of internal bureaucracy, buyer inexperience, or a buyer power play? It can be hard to determine the true cause; however, in deciding whether or not to grant an extension(s), the seller must decide how important that buyer is to the process, will that buyer ultimately be a viable contender to acquire the company, and are these actions a signal of how the transaction process would proceed with this buyer.

  2. Insist on an unreasonably long exclusivity period. Buyers almost always request exclusivity in the LOI in exchange for committing time and resources to the transaction. The exclusivity period should be long enough for the buyer to run their process, i.e., complete due diligence, negotiate a purchase agreement, etc. However, the exclusivity period should also be short enough that if the deal does not work out or the buyer simply does not aggressively undertake the purchase process, the seller is not tied to the current buyer for an unreasonably long period of time. In addition, if, the buyer is not aggressively undertaking diligence, spending money, and drafting a purchase agreement during the exclusivity period, the seller is under no obligation to extend exclusivity once it expires. Hence, the seller should not be restrained by an unreasonably long exclusivity period if the buyer is not taking steps to consummate the acquisition as mutually agreed in the LOI since extended timing generally does not favor the seller.

  3. Bid up the IOI (with no intention of paying that price) to get into the next round. Buyers who are keen to get to the management presentation will often offer a higher price in their indication of interest (“IOI”) letter so the seller will invite them to the management presentation. Once the buyer attends the management presentation, they may back-peddle on the price that they include in the Letter of Intent, offering excuses as to why they now believe the company is not worth the price they initially offered. The seller should challenge the buyer on this and ask the question: if they loved the company on paper and it was good enough to want to attend the management meeting, what changed? A buyer who cannot provide a well-reasoned response to this question may be pulling the dastardly buyer trick of bidding up the IOI.

  4. Bid up the LOI to get control of the deal with no intention of paying that price. Similarly, a buyer may submit a letter of intent (“LOI”) with a high purchase price to gain exclusivity and control of the deal while giving themselves time to decide if they actually want to purchase the company. The leverage always shifts from the seller to the buyer once the LOI has been executed. However, buyers have been known to include a price in the LOI without any intention of paying that price. The purpose is to lock up the seller while the buyer figures out the price they actually want to pay for the company and the buyer weighs this acquisition opportunity against other opportunities.

  5. Will not negotiate key terms (subject to diligence) in the LOI. Before inking an LOI, the buyer and seller have little to go on but some conviction that the potential transaction fits their respective objectives and there is a degree of chemistry between the buyer and the seller. The LOI is meant to lay out the basic terms of the transaction: the total consideration, form of payment and how the transaction will be structured, among many others. It is also well worth the effort to flesh out numerous other terms in the LOI as groundwork for drafting the purchasing agreement. These terms include indemnification provisions, cap and basket, definition of fundamental reps and warranties, and crucial transaction-specific terms. An understanding with respect to management and employees, compensation and benefits, incentive plans, the due diligence plan, the real estate lease (as applicable), conditions to closing, and timing should also be included in the LOI. If the buyer refuses to negotiate key terms in the LOI, this may be an indicator of what it will be like to negotiate with the buyer after the LOI has been executed. The seller has maximum negotiating power prior to the execution of the LOI as they can leverage the competition created by having several interested buyers. However, after that point, the seller’s negotiating power decreases while the buyer’s negotiating power increases. So, it is important for the seller to specify all of the critical terms and conditions in the LOI to avoid fighting about them later when the leverage has shifted to the buyer.

When it comes to buyers who seek to gain the upper hand prior to entering into an LOI by using these dastardly and unfair tricks, the takeaway is, “seller beware.” The owner should make every attempt to get to know their prospective buyer as well as possible; they should do their homework carefully so they can make an informed decision before signing an LOI. It is safe to assume that buyers that try to employ these dastardly tricks prior to executing an LOI will have more dastardly tricks up their sleeves after they enter into an LOI with the seller. In Part 2, we will discuss seven more dastardly tricks buyers often employ after signing an LOI.