No One Likes a Re-Trader in the M&A World

In the world of M&A, one of the quickest ways to damage your reputation and derail a deal is through what's known as a “re-trade”—attempting to renegotiate the key business terms that were already agreed to in the letter of intent (LOI). While some people might think the LOI is just a non-binding starting point, treating it casually can be a huge mistake, both for the success of the current deal and for your credibility in future transactions.

What Is a Re-Trade?

A re-trade occurs when one party comes back to the negotiating table after the LOI has been signed and tries to change material business terms that were already agreed upon, like the purchase price or other significant elements of the deal. This happens well after both parties have invested time, money, and resources in due diligence and legal work based on the expectations set out in the LOI.

For example, if the LOI sets the purchase price at 5x EBITDA, and then, later in the process, the buyer attempts to lower the multiple to 4x without a justifiable reason (such as new material findings), that would be considered a re-trade. This kind of behavior is absolutely disfavored because it undermines trust and can cause deals to collapse, wasting valuable time for both parties.

Why Is Re-Trading So Bad?

Re-trading damages the negotiation process and the relationships between the buyer and seller for several reasons:

1. Undermines Trust: The LOI is a foundational document that reflects the basic business deal both parties agreed to. Even though it may be non-binding, the terms it outlines serve as the roadmap for finalizing the transaction. Changing those terms without justification signals that one party may not be negotiating in good faith, which can damage trust between both parties.
2. Wastes Time and Resources: By the time you get past the LOI stage, both the buyer and seller have already invested substantial time and money into due diligence, legal review, and financial analysis. Re-trading at this stage can cause delays, additional costs, and, in some cases, completely derail the deal, resulting in significant wasted effort.
3. Harms Reputation: In the M&A community, reputation matters. Buyers or sellers who are known to re-trade on terms after the LOI risk developing a negative reputation, which can hurt future deal-making. Brokers, advisors, and even other buyers and sellers become wary of dealing with parties who have a history of renegotiating terms after the fact.
4. Destabilizes the Deal Process: One of the primary purposes of the LOI is to give both parties a degree of confidence that the deal will proceed according to the agreed framework. Re-trading can destabilize that framework, leading to increased friction and uncertainty in the negotiation process.

What Is Not a Re-Trade?

It's important to distinguish between legitimate adjustments to the purchase price and bad-faith re-trading. For instance, let’s say the LOI specifies that the purchase price will be 5x EBITDA. During due diligence, the buyer discovers that the actual EBITDA is $500,000 less than what was originally represented. In that case, seeking a reduction in the purchase price based on the agreed-upon formula is not a re-trade—it’s a necessary and logical adjustment. The key here is that the methodology remains the same, and the buyer is simply applying the agreed formula to more accurate numbers.

In contrast, changing the multiple (i.e., moving from 5x EBITDA to 4x EBITDA) or introducing new terms that weren’t contemplated in the LOI would be considered a re-trade.

Why the LOI Is a Big Deal, Even If It’s Non-Binding

Many buyers and sellers mistakenly assume that because the LOI is generally non-binding, it’s not a big deal. This is far from the truth. While it’s true that the LOI typically isn’t enforceable in the same way the final purchase agreement is, it’s still a crucial part of the deal process for several reasons:

1. Sets Expectations: The LOI establishes the core terms of the deal, such as the purchase price, the structure of the transaction, and other major terms. Both parties move forward with the understanding that these terms form the basis for finalizing the deal, even if they’re subject to adjustments after due diligence.
2. Builds Momentum: Once the LOI is signed, both parties begin committing resources—legal, financial, and operational—to get the deal done. This momentum is key to closing the transaction efficiently. Any deviation from the agreed-upon terms can cause significant delays and frustration.
3. Protects Relationships: In most M&A deals, the buyer and seller will work together closely during the transition period and possibly beyond. The negotiation process can set the tone for how well that relationship will work. Honoring the terms of the LOI helps build a cooperative, trusting relationship that can be critical for a successful transition post-closing.
4. Reduces Risk of Disputes: Having a clear LOI helps minimize misunderstandings and disputes later in the process. If one party tries to deviate from the agreed terms without a good reason, it’s easier for the other party to push back and point to the LOI as the reference point.

Conclusion: Respect the LOI to Avoid the Pitfalls of Re-Trading

The LOI may be non-binding, but it’s not something to be treated lightly. It sets the stage for the entire transaction, establishes trust, and ensures that both parties are working from the same playbook. Re-trading on LOI-agreed business terms without a justifiable reason isn’t just bad form—it’s a surefire way to create friction, harm your reputation, and possibly cause the deal to collapse.

By ensuring that the LOI is clear and that both parties understand the importance of adhering to its terms, we set ourselves up for a smoother, more predictable deal process, which ultimately benefits everyone involved.