In M&A, retrades—adjustments to the original purchase price—are commonly associated with missed financial targets, but that’s the tip of the iceberg. Often, it’s the hidden accounting, operational, legal, and technical gaps that create the biggest risks. Below, we explore the 5 main triggers of retrades and how to navigate them effectively.
1. Improper Revenue Recognition
One of the most frequent and clear-cut reasons for a retrade is improper revenue recognition. Buyers, particularly in software M&A, scrutinize how revenue is booked to ensure it adheres to strict standards like GAAP or IFRS. If there are discrepancies—such as SaaS revenues recognized prematurely or misaligned transactional income—the buyer may adjust their valuation to reflect the actual revenue base. This can lead to significant price reductions if their assumptions during the Letter of Intent (LOI) phase don’t match the financial reality uncovered during due diligence.
2. Technical Deficiencies
Technical issues discovered during due diligence can also trigger retrades. These might include outdated software architecture, security vulnerabilities, or insufficient scalability in your product’s technology stack. For software companies, buyers expect cutting-edge technology capable of evolving with the market. If a technical audit reveals gaps that require costly fixes, they may adjust the purchase price to account for the investment needed post-acquisition. Some buyers may even uncover integration challenges—like compatibility issues with their existing systems—that could necessitate extra resources to resolve. These technical deficiencies, if not proactively addressed or disclosed, can lead to last-minute price adjustments that factor in the required remediation of these issues.
3. Operational Deficiencies
Beyond technical challenges, operational deficiencies often lead to retrades. These can include poor documentation, inefficient business processes, or improper handling of employee compensation plans such as stock options or bonuses. A company’s internal operations are critical to smooth integration post-transaction, and if a buyer discovers areas of dysfunction or potential legal liabilities, they will likely seek compensation through a purchase price adjustment that adjusts their risk using costly advisors to remediate the deficiencies.
4. Legal and Structural Issues
Legal complications are another common source of retrades. Buyers may discover unclear intellectual property rights, legal disputes, or unfavorable shareholder agreements that increase their risk. Additionally, if due diligence reveals ambiguities in how contracts are structured—such as vendor, shareholder or customer agreements—the buyer might renegotiate the terms of the deal, reducing the price or altering the deal’s structure (e.g., from a share sale to an asset sale, which often has different tax implications).
5. Buyers’ Overpayment Concerns
Even when there are no major technical or operational issues, some buyers enter negotiations with concerns that they are overpaying. They often look for minor flaws to justify reducing the price or renegotiating terms. This behavior is common in competitive bidding situations where buyers may feel pressured to offer a high price initially. After due diligence, they may seek any opportunity to adjust their bid downward to align with their investment committee’s expectations.
Managing Negotiations and Creating Competitive Tension
A critical component in preventing retrades is how you manage negotiations. Buyers are often more likely to push for price adjustments when they sense they have leverage, particularly if there’s no competition. To mitigate this, running a well-structured process with multiple buyers is crucial. Competitive tension forces buyers to remain committed to the original terms, as they know the seller has other options. Furthermore, skilled negotiation management is essential to maintaining the buyer’s focus on the strategic value of the deal, rather than haggling over minor issues.
Having an experienced M&A advisor such as Hemisphere Partners, allows you to maintain a balanced, strategic approach throughout the process. Sellers need to focus on long-term integration and vision while leaving the finer negotiation details—especially those that could trigger retrades—to the advisor. By involving multiple buyers, the seller can create a competitive dynamic that makes it more difficult for any single buyer to retrade without risking losing the deal altogether. This also positions the seller to respond firmly to any proposed retrade, as they have credible alternatives.
Keep the Process Competitive and Clear
Avoiding retrades in an M&A transaction comes down to thorough preparation and strategic execution. By proactively addressing technical, operational, and legal gaps and by managing the negotiation process with multiple buyers, you can limit the chances of a price adjustment. Ultimately, the goal is to create a compelling deal dynamic where buyers recognize the strategic value of the business and are less likely to attempt a retrade.
