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One Overlooked Strategy When Negotiating an LOI

Negotiation for investment bankers is an everyday affair. There are many points to negotiate: retainers, exclusivity, success fee, auction process vs. targeted process, due diligence period, purchase price, earnouts, cash at close, and so forth. In fact, negotiation is one of the top reasons why a company selects an investment bank to represent their interests. We’ve interviewed several reputable investment bankers who are members of Axial about negotiation tactics, and one theme kept reoccurring—let your client do some of the negotiating.

Let’s use a simplified example to illustrate our findings. Say you’re exclusively representing a manufacturing company for sale. You took on the project because your client was highly motivated to sell the business at a fairly reasonable valuation. The client expressed a strong interest in remaining with the company post-transaction, but also indicated to exit the company under the right offer. In short, you believed the project had a high likelihood of success given the flexibility of your client.

Fast forward several months after winning the deal. You’ve managed the sales process quite smoothly and generated a large amount of interest from the buyer community. You have five letters of intent (see Axial’s white paper: “Seven M&A Documents Demystified” for more details on an LOI) and you’ve reviewed each of them in detail with your client. Unfortunately, the LOIs fall short of your client’s expectations.

To further complicate matters, your client now prefers to exit the business after the sale, primarily because of the current offers; all of the offers on the table require your client to remain active in the business. Your client is still remotely interested in remaining with the company, but the offer has to be right, i.e. large earnout over several years to capture the company’s upside performance.

By this point you’ve negotiated with the five buyers and conveyed your client’s feelings. But you’re not getting the results you want; buyers are making concessions here and there, but none of them match what your client is looking for.

According to our research, this might be the perfect time to set up a one-on-one conference call between your client and each buyer and let both parties work through any differences, of course with your counsel. You’ll need to prep your client before the call, cover talking points and help your client frame their discussion. You’ll also need to be on the call with your client and provide any support necessary during the conference call.

In this situation, even with your guidance and involvement, you should let your client freely negotiate—that is let your client explain to the buyer why they want a certain deal structure and the logical reasons for it. Doing so ensures that the seller’s message is accurately delivered to the buyer with no filters. And your client will mostly likely speak from the heart with a lot of emotion and thought, something that can help build and strengthen the buyer relationship and lay the ground work for continued deal discussions.

Another benefit for letting your client do some of the talking is that it keeps communication open and gives the buyer a better sense for your client. The buyer may see your client’s perspective, understand their logic, and as a result, be more willing to structure a deal that wins for all parties involved.

You’ll of course need to determine if your client has the right personality and mental fortitude to handle such discussions and if your client is capable of expressing his or her feelings in a professional way. You’ll also need to determine if your client has any desire to negotiate or if they prefer you to handle it. You might have a client that has no desire whatsoever to get on the phone and negotiate. Whatever the case, it may be beneficial for you to consider letting your client handle some of the negotiations with buyers if you’re encountering some challenges to getting the perfect deal.

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