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Re-trade

| Reviewed by John CarvalhoCheckmark
Published: September 18, 2015
Presented by Divestopedia

What Does Re-trade Mean?

A re-trade occurs when the buyer of a company reduces the amount of their original offer to a lesser amount. This usually happens after the initial steps of the sale transaction have been taken, and it will cost the seller heavily to back out of the transaction. In this case, the buyer is often taking advantage of the seller, because the seller may not have any other prospective buyers waiting in the wings.

If the seller decides to cancel the sale transaction, it will forfeit all of the time and money that was spent negotiating the deal. For this reason, the seller in many cases will reluctantly agree to the buyer’s reduced offer so as to avoid these losses. A re-trade can be seen as a form of power play on the part of the buyer, who may know that they are the only suitor for the company in question. If this is the case, then the buyer essentially has the freedom to try and low-ball the purchase price.

Re-trades can also happen for legitimate reasons rather than as a power play. During the due diligence process, the buyer may discover a flaw or shortcoming in the business being sold and thus lower its bid accordingly. Sellers therefore need to be prepared to answer any and all possible questions about the company so that there are no surprises later on. A seller that tries to conceal the defects in its company or property is usually asking for trouble in the form of a reduced sales price, if not a complete withdrawal of the offer.

Re-trade tactics can be at least partially avoided by drafting a letter of intent (LOI) that stipulates that the buyer will be fined a certain amount if they try to come back with a lower asking price. Sellers who can prove that their company is worth its price based on the income that it has provided stand a much lower chance of being re-traded.

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Divestopedia Explains Re-trade

A re-trade can be used by a buyer in a transaction where the buyer knows that they are in the driver’s seat. For example, if the seller is pressured to sell because they face substantial adverse tax consequences if it cannot sell the company within a given time frame. The seller may thus be forced to accept the lower price in this case in order to avoid further financial repercussions.

Of course, in some cases, the buyer can have a good reason to lower its initial bid when it finds material flaws in the company while it is performing its due diligence. If the buyer was to discover that the company it is bidding on has not generated as much income as the seller initially reported, then a re-trade would be a reasonable response.

But many buyers continue to use a re-trade as a method of saving money at the expense of the seller. Some sellers have adopted “no re-trade” clauses in their contracts in order to prevent this practice. And some buyers now advertise that they will not try to re-trade their deals in an effort to entice more sellers. Re-trades are not as common as they once were, but they still happen with some degree of regularity in the markets today.

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