Signing a Letter of Intent (LOI) feels like crossing a finish line. For someone new to M&A, it might seem to signal that the deal is nearly done. It is not. An LOI is, in almost every respect, a non-binding document. The price is not final. The structure is not final. The terms are not final. What is binding is far narrower: typically, a 60-day exclusivity period (meaning you can no longer speak with other buyers), along with confidentiality. Everything else is non-binding.
The practice of renegotiating price or terms after the LOI is signed is called retrading. It is more common than sellers expect, especially when a business is not well prepared for post-LOI buyer due diligence. A buyer may enter diligence fully committed at their LOI price, then surface legitimate issues that were not known before signing the LOI (such as a significant flaw in your accounting, a working capital shortfall, a concentration concern, or a compliance issue), and return with a lower offer. In Deal Note® 202, we discussed how buyers often fully price their initial bids and look to correct that price if they find problems during diligence.
Your best protection to avoid retrading is to be extremely well prepared for post-LOI buyer due diligence. Get ahead of potential issues a buyer may raise and preemptively address them long before signing an LOI. As we say in almost all Deal Notes, preparation is the key to success for sellers of middle-market companies in the aerospace and defense industry.
Have a great day,
Max McFarland
Associate
