Introduction

Even when a transaction is going well, surprises can surface during due diligence. A buyer may raise a new concern or try to renegotiate terms late in the process. By that point, you have agreed to the terms, signed a letter of intent, and entered the exclusivity period. A late change requested by the buyer based on their findings is hard to accept. But after the money and emotional energy you’ve already invested, it can also be hard to walk away.

In this article, Keith Dee shares a real example of how Osage Advisors helped a client navigate an unexpected buyer request and find a solution that kept the deal moving forward.

Expect the Unexpected

In a recent transaction, financial due diligence came back stronger than expected. Even so, the buyer raised a concern about customer concentration. One customer accounted for a meaningful share of the company’s revenue, and the buyer wanted protection if revenue from that customer declined after closing.

Customer concentration is one of the most common issues buyers raise, and it is a legitimate concern. Buyers want to understand how sticky the customer relationship is and who owns that relationship within the company. If the relationship rests mainly with the owner who is selling, the risk goes up. The real question is how much protection the buyer deserves, if any, and who bears the cost.

The buyer proposed reducing the cash paid at closing and moving part of the purchase price into a contingent seller note that would be reduced if the key customer’s revenue fell. The proposed structure placed too much risk on the seller and could have significantly reduced what they received from the transaction, even if overall revenue stayed in line or increased.

A Retrade Doesn’t Mean You Have to Accept It

What this buyer proposed is known as a retrade: an attempt to renegotiate agreed terms during due diligence. It puts the seller in a difficult spot. Starting over with a new buyer means more delay, more cost, and the risk that other buyers wonder why the first deal fell apart.

But a retrade doesn’t leave you with only two choices: accept it or walk away.

Often the better answer is a third option: negotiate a structure that addresses the buyer’s concern without shifting all of the risk to you.

Before responding, it helps to separate the buyer’s underlying concern from the fix they proposed. In this case, the concern was reasonable. The proposed fix was not.

Find a Solution That Works for Both Sides

Rather than accepting the buyer’s original proposal, Osage worked directly with the buyer and their lender to create a more balanced solution. Bringing the lender into the conversation mattered. A seller note in a deal like this typically sits behind the bank’s senior debt, so any change to its terms has to work for the lender, too.

The key change was to measure the company’s total revenue rather than revenue from the key customer alone:

• If total revenue held steady during the measurement period, the seller would receive full payment on the note, even if business from the key customer declined materially.
• If total revenue declined, the note would be reduced dollar for dollar by the shortfall, so the seller would still receive the remaining balance of the note.

The result protected the buyer while giving the seller a fair opportunity to receive the full value of the deal. The buyer was covered if the business truly declined, while the seller got credit if new or growing business made up for any lost volume from that customer. The deal stayed on track.

Why Representation Matters

Selling a business can become especially challenging when unexpected issues arise. Most owners sell a business once. Many buyers, particularly private equity firms, and their lenders do this regularly. An experienced advisor brings that same experience to your side of the table and helps find solutions that work for you and that the buyer can accept.

An experienced M&A advisor can help:

• Evaluate whether a buyer’s request is reasonable
• Translate the proposal into terms so you understand the costs and structure
• Push back when terms are unfair
• Find alternative solutions that work for you
• Keep negotiations moving toward closing

The Bottom Line

Unexpected issues are part of almost every transaction. When these issues arise, the key is knowing when to push back, when to negotiate, and how to bridge the gap with a solution that works for you.

The right advisor can help protect your interests while finding a path toward a successful deal. If you’re considering a sale, Osage Advisors would welcome the conversation.