By Frank Williamson, Oaklyn Consulting
Selling a business is rarely a fast or stress-free process, and even the most promising deals can fall apart at the very last minute.
When they do, there’s frequently a logical reason why. But if a final agreement seems imminent and one party suddenly elects not to move forward, the other party is faced with a stark choice: renegotiate or move on.
By definition, renegotiation happens at the 11th hour of the deal process. Up until then, either party might do a certain level of complaining or even threatening to pull out of the deal. But it’s not truly renegotiation until a deal is unable to proceed under its current terms, and buyer and seller have a clear choice to try again or walk away.
Depending on the circumstances behind the stalled deal, it might still be the best course of action to restart negotiations under different terms. Other times, there are clear signs that a transaction is better off left abandoned.
Here are a few of the most common scenarios that can derail a business sale:
1. Initial assumptions turn out to be invalid
People often talk about deal prices as a multiple of previous earnings, but beneath the surface, the way of establishing a business’s value is by looking forward, not back — to base it on the future returns that can be generated by people working together.
Typically, people negotiate deals with limited information, which they validate after coming to terms on the basic framework of a deal. Sometimes, in the absence of facts, one party may make assumptions that, under closer inspection, turn out to be inaccurate.
Assuming that both parties are being above-board negotiators and the difference between assumptions and reality can be explained in a transparent way, it can be possible to salvage such a deal — though the amount of money that changes hands is likely to be different.
2. Other parties aren’t participating in the expected way
A deal is technically just between a buyer and seller, but its success usually also depends on the participation of other important parties. For buyers, that third party could be a financial sponsor or lender who provides capital to finance the buyer’s payments to the seller.
Maybe the buyer believed they could get certain terms or financing from their financial sponsor, though that agreement wasn’t actually final. A financial sponsor or lender is well within their rights to come up with different terms if they’re so inclined, even if it puts a squeeze on others involved in a deal.
On the seller side, one example of a reluctant third party might be a major client who doesn’t want to do business with the potential buyer. If a deal only appeals to the buyer because it includes all the seller’s current clients, the seller may need to find out how to make the client amenable to the deal, then ask to change the terms.
Another scenario could be that a key employee doesn’t want to work for the buyer. This might make the business less valuable in the buyer’s eyes, likely resulting in a modification of the deal terms.
3. Changes required by regulators
Regulators have the important job of protecting the general public from the negative impact of certain types of business combinations, such as two competitors merging in a way that reduces consumer choices. Regulators might require certain changes to be made to the terms of a deal before approving it.
I’ve encountered this in my firm’s work with nonprofits. Since these organizations have a public benefit element, any major change might be scrutinized by the IRS or a state nonprofit regulator, who may say that the transaction doesn’t advance the nonprofit’s stated mission. One example could be payouts to executives that regulators view as excessive.
4. One party is trying to get a better deal
Over my career, I’ve rarely encountered the practice known as retrading, which some in private equity consider a customary part of the deal process, but others, myself included, view as unethical. Retrading is where one party comes up with an arbitrary reason to change the terms at the 11th hour, after the terms have been agreed upon and due diligence is complete. They do this assuming that their partner doesn’t have any better options and will acquiesce.
Some people say it’s just business, and the revised terms may still represent the best option available. Still, it’s a ruthless strategy that leaves a foundation of mistrust, making future collaboration difficult.
How and when to renegotiate
When circumstances change and a business sale can’t proceed under its original terms, the first question that needs answering is whether renegotiation is even the best option.
It’s normal for early agreements based on assumptions to change as the parties flesh out details. If one side learns something that’s fundamentally different and changes their view of the deal, it may take a high level of transparency on the part of the other party to reestablish a functional level of trust.
When you’re on the receiving end of a request to renegotiate, it’s important to stop and clarify each side’s goals for the future. When doing so, discuss what success looked like before and what it looks like now. Sometimes that will mean that the parties mutually decide to shake hands and part ways. However, when both parties trust each other and share a determination to proceed, it’s very possible to reground on the future and begin discussing a new set of deal terms.
If you’re committed to getting to a deal, you can make a difference in the ease of the process by displaying all the characteristics of good problem solving. Are you being transparent? Are you asking the right questions of the other party? Are you open to making joint modifications based on the facts?
Remember, until there’s a final deal, everybody can just walk away. If your party sees the value in moving forward, you can work to be part of the solution, even if there are unexpected bumps along the road.
About Frank Williamson
Frank Williamson is the founder of Oaklyn Consulting, a different kind of investment banking firm for small- and medium-sized companies under private ownership. Oaklyn plans and executes its clients’ most complex transactions, including mergers, acquisitions, capital-raising, recapitalizations, and lender and investor relations. Oaklyn supports businesses, investment firms, nonprofits, co-ops and partnerships. By working as consultants, not brokers, Oaklyn helps in situations where traditional investment bankers typically cannot.