Most of a sale process is good-faith give and take. But sellers should stay alert when a buyer starts making unreasonable, often extreme, demands to gain an unfair advantage, what we call dastardly buyer tricks. Negotiation runs through the entire process, not just the start and the close, and a seller should be willing to walk away at any point, even the eleventh hour. Here are five tricks buyers may try before signing a letter of intent.
Constantly requesting extensions
In a competitive process, the banker sets a timetable to keep all buyers at a parallel point: an indication of interest by a date, a management presentation in a narrow window, a letter of intent by a date. Some buyers always seem to need more time. A buyer who entered late through no fault of their own may need to catch up, but that should not extend past the IOI. Ask whether the constant requests reflect internal bureaucracy, inexperience, or a power play, and weigh how important that buyer really is to the process.
Insisting on an unreasonably long exclusivity period
Buyers almost always ask for exclusivity in the LOI in exchange for committing time and resources. It should be long enough to run diligence and negotiate a purchase agreement, but short enough that the seller is not tied up if the deal stalls. If the buyer is not actively pursuing diligence and drafting documents, the seller is under no obligation to extend exclusivity once it expires. Extended timing rarely favors the seller.
Bidding up the IOI with no intention of paying it
Buyers eager to reach the management presentation may inflate their indication of interest to earn an invitation, then back-pedal in the LOI with reasons the company is suddenly worth less. Challenge them: if they loved the company on paper, what changed? A buyer who cannot give a well-reasoned answer may be playing this game.
Bidding up the LOI to control the deal with no intention of paying it
Similarly, a buyer may submit a high LOI price to win exclusivity and control while they decide whether they actually want the company. Bargaining power shifts to the buyer once the LOI is signed, and some buyers exploit that by locking up the seller while they figure out the price they really want to pay and weigh other opportunities.
Refusing to negotiate key terms in the LOI
Before the LOI, the parties have little beyond a sense of fit and some chemistry. The LOI should lay out the basics, total consideration, form of payment, and structure, and it is worth using to flesh out indemnification, caps and baskets, fundamental reps and warranties, the treatment of management and employees, compensation, incentive plans, the diligence plan, leases, conditions to closing, and timing. A buyer who will not negotiate these in the LOI is showing you what negotiating after the LOI will be like. The seller has the most bargaining power before signing, when competition among buyers is real, so pin down the critical terms then, before that power shifts.
When a buyer tries to gain the upper hand before the LOI with tricks like these, the watchword is seller beware. Get to know your prospective buyer as well as you can, and do your homework before signing. It is safe to assume that a buyer who plays these games before the LOI has more up their sleeve afterward. In part two, we cover seven more tricks buyers tend to pull once the LOI is signed.
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