As noted in Dastardly Buyer Tricks (Part 1), negotiating the sale of a company is often tricky — and negotiations tend to become more challenging throughout the course of the transaction as the balance of leverage tips from the seller to the buyer. The negotiation process can become particularly fraught with land mines if the buyer begins to make extreme or unreasonable demands, pulling what we call “dastardly buyer tricks” in an attempt to “get a leg up” on the seller. In these scenarios, the seller must remain, calm, exercise caution, keep their wits about them, and be mindful of the fact that they have the ultimate leverage in the transaction — the ability to walk away from the deal, even at the 11th hour, if the buyer tries to employ these dastardly tricks to maneuver a fair deal (as negotiated in the letter of intent) to a one-sided transaction in favor of the buyer.
In Part 1 of this two-part series, we discussed dastardly tricks some buyers try to pull prior to entering into a Letter of Intent (“LOI”) with the seller. In Part 2, we will examine buyer tricks that typically occur after the buyer and seller have inked the LOI:
- Use diligence to illegitimately renegotiate the price rather than to undertake due diligence as confirmatory.
The seller needs to hear from the buyer that diligence is confirmatory. If the seller has taken all of the appropriate steps to prepare their business for sale, there should, in theory, be no outcome other than diligence is confirmatory. However, dastardly buyers may use the diligence process to lower the purchase price and change the terms of the transaction. They will usually use this trick in combination with other dastardly tricks — gaining exclusivity and control of the deal, for example, then co-conspire with their advisors — quality of earnings accountants and lawyers — to create the appearance of a legitimate diligence issue in order to demand changes to the transaction. Again, it is up to the seller to challenge the buyer’s assertions and rationale for the change in terms. The seller should be prepared to reject categorically the unjustified proposed changes, and absent a new meeting of the minds with the buyer, be prepared to walk away from the deal.
- Seek out “gotchas.”
Badly behaved buyers seek out every opportunity to find something that the seller and/or their advisors did not tell them about the company. In doing so, they hold every negative piece of new information, no matter how immaterial, against the seller in an effort to incrementally renegotiate the transaction. At the same time, they ignore all positive information and company developments learned during the process. Again, the seller’s best defense against the repetitive nature of this approach is to push back against the buyer and ultimately be prepared to walk away from the transaction.
- Direct counsel to write a largely one-sided first draft of the purchase agreement.
Although both parties contribute to writing the purchase agreement, someone must take the lead — conventionally, that is the buyer. As with most legal documents, the party who writes the first draft has the advantage. As such, dastardly buyers may use this opportunity to draft a purchase agreement that is tremendously one-sided, serving only their interests. That means the seller — and their lawyers — must spend an inordinate amount of time (and the seller’s money) to redline and revise the agreement to make it a fair, reasonable, and a centered agreement for the seller. Ultimately, significant effort is invested to arrive at a document that could have been achieved with much less effort and cost.
- Take extreme positions on every deal point; every demand is an effort to wear down the seller.
Some dastardly buyers will take an extreme position on every deal point claiming that each point is “market.” Even if the buyer wins only a few of these points, they have incrementally improved the deal for themselves. Some will do this repeatedly in an attempt to wear down the seller so that over time, the seller will agree to the proposed changes or extreme terms just to get the deal closed. As above, the seller needs to stay firm in their convictions and not be bullied by unreasonable buyer demands or statements that the position is “market.”
- Are not transparent in the process.
Mutual transparency is of the utmost importance during the sale process. Buyers may refuse to be transparent about any number of aspects of the deal, including the status of the transaction, various legal documents and when they will be made available to the seller, financing, any outstanding issues, the timing in which they expect to close the deal, and various other factors. This lack of transparency can work against the seller and be quite frustrating. The seller should insist on frequent, standing update conference calls to assure transparency. The seller can also remind the buyer that without transparency, they may be less willing to extend exclusivity if the buyer bumps up against that deadline.
- Use the target working capital construction to their advantage.
The working capital concept is intended to be net neutral to both parties — neither the buyer nor the seller should make money once the working capital target has been set. Dastardly buyers will seek a one-sided working capital adjustment in their favor or use the working capital adjustment as a way to lower the purchase price by insisting on an unreasonably high working capital target.
- Demand a purchase price adjustment or change in material terms at the 11th hour even though nothing has changed.
The buyer’s strategy is based on the following assumptions a) the seller is highly invested in the transaction, b) the seller has “crossed-over” to having sold the company, and c) the company will be damaged if the transaction does not close. As a result, the seller will have no choice but to agree to the buyer’s unreasonable demands. As with many of the dastardly buyer tricks, the seller needs to stand firm and respond with a resounding “NO.” We have never experienced this, but we have heard horror stories about it happening in other transactions.
Sellers can potentially avoid these dastardly buyer tricks by making an informed decision about their prospective buyer i.e., doing their diligence on the prospective buyer, before signing an LOI. The owner should also be careful not to “cross-over” — in other words, the seller should not act like the company has been sold before the company has actually been sold. Owners who cross-over before the transaction is complete are more apt to capitulate to unreasonable demands like the ones listed above. Therefore, the owner who keeps their wits about them and does not allow a dastardly buyer to take advantage of them will be more likely to receive a fair price/terms for their company and achieve an outcome that meets their objectives.
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