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When Is The Right Time To Renegotiate An Offer?
By Quiet Light
Negotiating to buy a website can be a stressful process. Each side has their sets of expectations, and equally, both sides will have to do a lot of “give and take” to reach a final deal. So when the buyer or seller suddenly says before signing on the dotted line that they want to renegotiate an offer, you would be forgiven for feeling rather hacked off.
So what grounds could a buyer or seller have for wanting to renegotiate an offer? Moreover, if you are that person, how and what is the best way to approach the whole situation without making enemies out of everyone else?
Two Typical Causes of a Renegotiation: Major Changes and Misrepresentation
Normally, there are two scenarios in which renegotiating an offer makes sense. These are:
- Misrepresentation: When the figures shown before the formal offer turn out to be notably incorrect, or when a buyer discovers something important that wasn’t disclosed before the offer was made.
- A Drastic Change: When the business earnings either drop or rise significantly.
Obviously, there can be other scenarios in which a buyer or seller may feel justified in asking for a new price. However, the above two are the most common ones.
Misrepresentation or Under-representation May Require a Renegotiation
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Before you submit an offer, how much research should you do before making an offer? This article helps explore this topic.
Before making a formal offer, the buyer does not normally get access to sensitive proprietary information until a formal offer has been made for the business. This proprietary information can include a broad range of things including tax returns, bank statements, important private conversations with key employees, and other correspondence. Any one of these can positively or negatively affect the valuation of that company.
However, a buyer doing due diligence and going through the company’s paperwork with a fine-tooth comb may uncover some items that were not previously discussed, or it may uncover some items that were represented incorrectly.
Often, accidental omissions or misrepresentations are not enough to make a deal unappealing. Rather, it may just require slight changes in the terms of the deal.
Significant Changes in Profitability Can Change a Buyer’s Expected ROI
More difficult to navigate, however, are events where a business experiences significant shifts in it’s profitability between the time an offer is accepted and the time the deal closes.
- The acquisition of a new, significant client could provide a significant long-term boost to revenue
- The loss of a long-term client could provide a long-term reduction in revenue
- If a seller acquires an exclusive contract to sell a product, this could have a significant positive effect
- If a vendor stops selling a product, this could have a detrimental effect.
These are just a few of the many scenarios which may impact a business – we have seen a number of other examples.
If you are faced with a situation where a business has a major shift in revenues, you’ll be faced with the difficult question of whether you should renegotiate the offer.
Renegotiation Without a Good Reason is Considered Acting in Bad Faith
A request to renegotiate an offer is understandably not taken very well. The very purpose of agreeing to a price and terms in a Letter Of Intent (LOI) is to help set expectations for a final contract. Given the amount of work a buyer and seller put into the period before that initial offer and the eventual closing, having the already agreed upon purchase price thrown into doubt is a virtual ‘punch in the gut’.
This is why renegotiating an offer requires a serious reason. If you do not have a serious reason, such as a change in the business, or a discovery of something previously undisclosed, it can appear as if you are simply taking advantage of the process.
Valuations Only Capture Value from a Moment in Time
Before negotiations can begin, the seller and potential buyer ought to agree on a purchase price. Assuming everything goes smoothly in due diligence, this purchase price and the major terms of the deal should remain the same.
That said, the formula used at the LOI stage will end up producing a slightly different valuation at the closing stage. This is due to the normal fluctuations in any business, where it’s normal for a company to have good months and bad months.
The table below shows an example of how this might happen. Let’s say you made an offer on a business that had $100,000 in earnings at the time of your offer. The multiple is decided upon, and an estimated value is calculated.
However, if between the LOI and the closing of the deal, that company suddenly has a good month and increases their earnings, the estimated value would be slightly different. In this example, $15,000 more.
|12 Month Earnings||Multiple Used||Est. Value|
Small variations like this are to be expected in any deal. Just because the business has a slightly stronger month or slightly weaker month is not a good reason to renegotiate the already agreed upon price.
However, on the off-chance that a business’ revenue DOES fluctuate up or down quite dramatically, this could make the buyer or seller rethink the offer in terms of what the buyer is willing to pay or what the seller is willing to accept. This could lead to a renegotiation of the offer.
If You Must Renegotiate, Follow These Guidelines
If you discovered misrepresented (or underrepresented) data in your due diligence, or, if in the course of performing your due diligence, the business had a terrible (or great) run of revenue, a renegotiation may be warranted.
But how do you know when you have reached that point? How can a buyer or seller approach such a situation without being accused of acting in bad faith?
Here are some guidelines that I’ve seen from past deals that may help.
Ignore Changes Less Than 10%
This isn’t absolutely set in stone and depends on the individual buyer or seller. But in practice, most buyers or sellers take notice when the change is 10% or more. Anything less than 10% is just considered normal business fluctuations and is ignored.
Of course, this may depend a bit on the business itself. If a business lives on low-volume, high-revenue sales events, it should be expected that it will fluctuate more on a month-to-month basis. On the other hand, if a business lives on high-volume and low-revenue sales events, a change of 10% in 30 or 45 days could be quite alarming.
Look for Root Causes That Might Indicate a Change in the Business Itself
Changes in earnings should be expected by both the buyer and the seller. However, saying that, if the changes are huge, this can raise lots of red flags about the actual state of the business itself.
As previously stated, change should only really be noted if it is over 10%. When that happens, you need to start asking the most important question of all – what is happening to cause this sudden change?
Understand the Underlying Causes
When you’re a buyer negotiating the sale of a business, you need to know you are buying something which is going to give you a good return on your investment. At the very least, you will want your initial investment back.
So when the revenues of that business spike either positively or negatively, you immediately have to ask yourself whether or not this is a temporary blip on the landscape, or an ominous preview of things to come.
If sales are going through the roof, you will need some assurances that things are only going to go up and up in the future. But on the flip side, if the sudden change is negative, you may find yourself in a situation where you would have to potentially invest additional funds to turn things around.
How To Ask For a Revised Offer
In order to not come across as looking like the bad person in this situation, there are certain protocols and decorums which you should ideally follow. This will make the whole renegotiation process as painless as possible.
Don’t Wait: Ask Early In The Process
Whatever you do, don’t wait until the last possible minute before throwing the wrench into the works. Put in your request as soon as possible.
Thinking that you are likely to get a better deal by waiting until the last possible moment because so much work has been done on the offer already, may only end up backfiring on you in a very messy way.
There Will Be Consequences
If you need to renegotiate a deal, be prepared to accept the inevitable consequences. It doesn’t matter if your renegotiation is entirely justified. After working hard under the terms of an accepted offer, it will always be discouraging to the party who is being asked for more (or less) money to change their expectations.
So you need to decide whether requesting a renegotiation is worth the hassle and the cost. Because you can also expect some other unwanted side-effects such as :
A more acrimonious relationship – you don’t need to be friends with the other party, but it does help to have a good working relationship. If you renegotiate the offer, the relationship will likely suffer, and this can impact the transition and training period.
The deal could break down entirely – The most common result of a renegotiated offer is a completely broken deal. Therefore, you should only renegotiate a deal when the existing offer is simply unworkable. Trying to renegotiate a deal just to get a better position is a recipe for disaster.
The broker will notice – If you are working through a broker, such as Quiet Light, please remember that they have probably seen every negotiation technique available, and therefore they’ll have a rather unfavorable opinion about your intentions.
Buyers who renegotiate deals for poor reasons may find that it is harder to get an future accepted offer through that broker. Sellers who re-negotiate a perfectly good deal are often dropped entirely by the broker.
If you need to renegotiate a deal, be prepared to accept the inevitable consequences.Click to tweet
Working In Good Faith Always Wins
Offers are made on numbers and metrics. Deals are closed when a buyer and seller trust each other.
The formulas used to determine a website’s value are prone to subjectivity and error given how they are structured. While these formulas have their flaws, they are still the best mechanism to establish a framework for negotiating the purchase and sale of a high-value website.
However, a buyer and seller need to enter into their agreement knowing that the method they used to determine an initial offer price is not intended for precision; rather, it is intended to act as a ‘post’ to establish a beginning point for price negotiations.
Changes in the business shouldn’t be feared, but significant changes can and should be questioned. As always, on every aspect regarding purchasing and selling a high-value asset, work first on developing goodwill.