Key Takeaways
- Retrading in M&A generally means changing the proposed purchase price or other meaningful deal terms after a letter of intent has been signed.
- A post-LOI price reduction is not automatically inappropriate. Due diligence may uncover information that materially changes a buyer’s view of earnings, liabilities, risk, or value.
- Buyers should connect any proposed adjustment to a specific diligence finding rather than use the seller’s reduced negotiating leverage as the primary reason to renegotiate.
- Strong pre-LOI analysis, clear valuation assumptions, and focused diligence can reduce the likelihood of a disruptive retrade.
A letter of intent often marks the point when a buyer and seller agree on the broad framework of a potential transaction, including an indicative purchase price. The buyer then usually moves into more intensive due diligence.
Because an LOI is commonly based on information available before full diligence is complete, later findings may show that key assumptions were incomplete or no longer support the original valuation. That can lead to a retrade.
Retrading is sensitive because it affects valuation, negotiation, and trust. A justified revision may protect a buyer from paying for value that is not supported by the facts, while an unsupported revision can damage credibility and put the transaction at risk.
What Is Retrading in M&A?
In M&A, a retrade generally occurs when a buyer seeks to change the economic terms of a proposed transaction after the parties have signed an LOI. Most commonly, it refers to a reduction in the proposed purchase price, but it can also involve changes to how consideration is structured.
A buyer might propose a lower headline price, a larger earnout, more seller financing, a larger escrow or holdback, different working capital requirements, or additional indemnification protection.
The term often carries a negative connotation because sellers may view a post-LOI reduction as an attempt to renegotiate after they have invested time in the process or granted exclusivity. Still, a buyer may have legitimate reasons to revisit terms when diligence reveals facts that materially alter the assumptions behind the original offer.
Is a Retrade the Same as a Purchase Price Adjustment?
Not necessarily.
Many private-company acquisitions include agreed mechanisms for adjusting consideration based on closing working capital, debt, cash, or other defined measures. Those mechanisms can operate exactly as negotiated and should not automatically be characterized as retrading.
A retrade generally refers to reopening previously proposed economics because new information, changed circumstances, or a reassessment of risk alters the buyer’s view of the transaction.
Why Can an M&A Offer Change After the LOI?
An LOI reflects the buyer’s view of the business at a particular point in time. Before signing it, the buyer may have reviewed financial statements, management information, and selected operating data, while comprehensive diligence remains outstanding.
The proposed valuation therefore often depends on assumptions about sustainable EBITDA, customers, working capital, contracts, and liabilities. Due diligence tests those assumptions. If a material assumption proves incorrect, the economics supporting the original offer may also change.
The Role of Due Diligence in a Potential Retrade
Due diligence should not be treated as a search for reasons to reduce price. Its purpose is to verify the investment thesis, identify material risks, and determine whether the company supports the valuation proposed in the LOI.
Financial and Quality of Earnings Findings
Financial diligence often focuses on the sustainability and quality of earnings.
A buyer may discover that normalized EBITDA is lower than expected because certain add-backs cannot be supported, recurring expenses were treated as nonrecurring, margins have deteriorated, or recent performance differs from what was understood before the LOI.
For example, assume a buyer valued a company based on $4 million of expected normalized EBITDA. During diligence, the buyer concludes that normalized EBITDA is closer to $3.5 million because some adjustments are not sustainable.
If the original valuation was directly tied to the higher earnings figure, the buyer may have a legitimate basis to revisit value. The appropriate adjustment still depends on the specific transaction; there is no universal valuation multiple or formula.
Working Capital Issues
Working capital can also affect transaction economics.
Many private-company deals establish a target level of working capital intended to support ordinary operations at closing. If actual working capital differs from the negotiated target, the final consideration may change under an agreed formula.
Diligence may also reveal seasonality, aging receivables, inventory issues, or payment-term changes that affect required working capital. An agreed working capital adjustment should be distinguished from a retrade of enterprise value.
Customer Concentration and Revenue Risk
Customer concentration can materially affect a buyer’s view of risk.
If diligence shows that a major customer plans to reduce purchases, an important contract is nearing expiration, or revenue is less recurring than initially understood, expected future cash flow may differ from the buyer’s original assumptions.
The question is whether newly discovered information materially changes expected performance or risk.
Operational, Legal, Tax, and Other Liabilities
Diligence may identify tax exposure, litigation, compliance concerns, deferred capital expenditures, employee retention risk, contractual obligations, cybersecurity issues, technology limitations, or other liabilities that were not fully understood when the LOI was submitted.
Some findings have a direct cost; others increase future expenses or reduce expected cash flows. Either may affect value if material.
Material Change vs. Opportunistic Retrading
The distinction between diligence-driven repricing and opportunistic retrading is critical.
A diligence-driven repricing occurs when new information materially changes the buyer’s understanding of earnings, liabilities, cash flow, or risk. The buyer can identify the issue, explain why it matters, and connect it to the proposed revision.
Opportunistic retrading is different. It occurs when a buyer attempts to reduce the price primarily because the seller is further into the process and may have fewer practical alternatives, rather than because the business has materially changed from what the buyer expected.
For repeat acquirers, credibility matters. Sellers and intermediaries remember buyers that appear to use an aggressive LOI simply to gain exclusivity before renegotiating.
When May Lowering the Offer Be Reasonable?
A revised offer generally has a stronger basis when the issue is material, was unknown or could not reasonably be evaluated before the LOI, is supported by diligence, and has a meaningful effect on earnings, cash flow, liabilities, or risk.
The proposed adjustment should also be connected to the economic effect of the finding.
The Adjustment Should Match the Finding
A disciplined buyer should avoid arbitrary reductions.
A one-time liability may warrant a different response than a recurring reduction in sustainable EBITDA. Buyers should ask how the issue affects cash flow or value, how likely it is to materialize, and whether structure can address it instead of price.
Alternatives to Simply Reducing the Purchase Price
A lower headline valuation is not the only way to address diligence risk.
Depending on the issue, the parties may consider an escrow, holdback, earnout, seller note, specific indemnification provision, working capital adjustment, revised closing condition, or another structural solution.
For example, uncertainty around a specific customer may sometimes be addressed through contingent consideration, while a discrete potential liability may be better addressed through an escrow or specific contractual protection. The appropriate solution depends on the transaction.
Why Buyers Should Avoid an Unnecessary Retrade
An unnecessary retrade can damage trust with the seller, reduce management cooperation, increase advisory costs, extend the transaction timeline, and raise the risk that the deal fails.
It can also affect the buyer’s reputation in future acquisition processes, where sellers and intermediaries may evaluate certainty of close and buyer credibility alongside headline valuation.
Buyers should avoid submitting an LOI at a value they do not genuinely expect to support.
How Buyers Can Reduce the Risk of Retrading After the LOI
The best way to manage retrading is to reduce preventable surprises before the LOI and address unavoidable surprises methodically afterward.
Conduct Better Pre-LOI Analysis
Buyers should review available financial and operating information carefully before establishing valuation, including historical and recent performance, customer concentration, capital requirements, and unusual financial adjustments.
The goal is not to complete full diligence before the LOI, but to avoid building valuation on assumptions that could have been tested earlier.
Make the Assumptions Behind the Offer Clear
A buyer should understand what must be true for its proposed valuation to make sense.
Those assumptions may involve normalized earnings, growth, working capital, customer retention, management continuity, recurring revenue, or capital investment. Explicit assumptions give diligence a defined framework.
Prioritize Diligence Around the Investment Thesis
Diligence should focus heavily on the factors that support the buyer’s investment thesis.
If customer retention is central to the acquisition rationale, commercial diligence should test it. If value depends on specific EBITDA adjustments, financial diligence should examine them closely. If management continuity is essential, retention planning deserves early attention.
Address Material Findings Early
When a meaningful issue arises, buyers should verify the facts, understand the likely economic impact, and communicate the issue once it is sufficiently developed. Waiting until the end of diligence can increase tension.
How a Buy-Side M&A Advisor Can Help
A buy-side M&A advisor can help an acquirer maintain discipline from initial evaluation through closing.
That may include developing valuation assumptions before the LOI, structuring the offer, identifying diligence priorities, evaluating whether findings affect enterprise value, quantifying economic impact, considering alternatives to a price reduction, and navigating seller communications.
At PHG Advisory, the objective of buy-side advisory is not simply to negotiate the lowest possible price. It is to help buyers pursue acquisitions with a clear rationale, informed valuation, disciplined diligence process, and transaction structure that appropriately reflects the risks and opportunities identified.
Retrading Should Be Driven by Facts, Not Leverage
An LOI is based on the information and assumptions available when it is submitted. Due diligence may confirm those assumptions, or it may uncover facts that materially change them.
When a new finding genuinely affects sustainable earnings, liabilities, expected cash flow, or transaction risk, revisiting the economics may be appropriate. Buyers should be able to explain why the issue matters and how the proposed adjustment relates to its impact.
A disciplined buyer does not use diligence simply as leverage to reduce price. It uses diligence to determine whether the transaction still supports the value, structure, and risk allocation originally proposed.
Handled properly, that approach can protect the buyer while preserving credibility with the seller and the broader M&A market.
Frequently Asked Questions
What does retrading mean in M&A?
Retrading generally refers to a buyer seeking to change the proposed economics of an acquisition after signing an LOI. It most often involves a lower purchase price but can also include changes to consideration structure or other material terms.
Can a buyer lower its offer after signing an LOI?
Potentially, yes, but it depends on the terms of the LOI, transaction documents, applicable law, and circumstances. Many LOIs contain both nonbinding and binding provisions, so buyers should consult qualified legal counsel regarding their specific obligations.
Why would a buyer change the purchase price after due diligence?
A buyer may reconsider value if diligence reveals materially lower normalized earnings, customer risk, working capital issues, unexpected liabilities, legal or tax exposure, capital requirements, or other information that changes expected cash flow or risk.
Is retrading always considered bad faith?
No. A price change supported by material new information can have a legitimate economic basis. Concerns arise when a buyer seeks to renegotiate without a meaningful change in facts and relies primarily on the seller’s reduced negotiating leverage.
How can buyers reduce the likelihood of retrading?
Buyers can reduce the risk by conducting stronger pre-LOI analysis, clearly defining valuation assumptions, prioritizing diligence around the investment thesis, and addressing material findings promptly and proportionately.
