While you may not have heard the term before, retrading has never been more relevant with Elon Musk’s offer to buy Twitter and both his and the media’s play-by-play coverage of the potential deal.
So, what is retrading? Simply put, it’s making an offer to a buy a business at a specific valuation (say, Elon’s $44B offer to buy Twitter) and then trying to significantly restructure or revalue the deal during due diligence.
While we’re looking at fewer zeros in the typical bootstrapped SaaS business sale, the concept is exactly the same and it’s something that Founders should be aware of as they evaluate potential buyers and deals.
The basics on retrading in bootstrapped SaaS acquisitions
In bootstrapped SaaS acquisitions, due diligence can be a little bit of a muddy term because it’s used for a buyer’s learning about the business both before the Letter of Intent (LOI) and between the LOI and closing. And those are two very different types of inquiry.
The first phase is intended to set the overall general terms for the deal at the LOI and the framework for a deal.
The second phase is usually a deeper dive on all aspects of the business to make sure everything is as the buyer expected and the seller represented before coming to close.
Retrading typically comes in during that second phase. Both individual buyers and firms that retrade go into an LOI assuming that the terms of the LOI will not actually be what they close on, and that in any deeper look at the business there will be opportunities for additional negotiation down on price — at least slightly and sometimes significantly.
This is obviously not great for the person selling the business, because meaningful LOIs usually set an exclusivity period. Once the seller signs an LOI, they can’t continue seeking other offers for the business. Buyers that engage in retrading are taking advantage of that, knowing that a Founder has disengaged from other buyers and that they won’t be in a good position to negotiate.
In the worst cases, the seller has already told their team (or in Twitter’s case, the whole thing has been widely publicized) and may think they are days away from closing.
How common is retrading?
Unfortunately, it’s very common. Some of the biggest names in private equity have this practice baked into their DNA — it’s just how they do business, and they perceive it as fair game to negotiate with Founders twice during every sale.
At SureSwift, we think this entire practice is fundamentally unfair to Founders, and we don’t engage in it. We own a lot of SaaS businesses, so we’re good at running them. If we can’t get a pretty good idea what it means to be the new owner of that SaaS company before LOI, that’s really on us.
It generally doesn’t come up, but if there’s any true surprises, lack of disclosure, or, dishonesty on the seller’s part, that’s a different situation. And on the rare occasion that we’ve uncovered something so big and unexpected during a second due diligence phase that we don’t think we could successfully operate a business, we’ve canceled the deal quickly so that the Founder can reengage with other potential buyers. To give you context on numbers, we’ve completed more than 40 acquisitions, and we’ve only had 2 deals we canceled after LOI. We’ve retraded on exactly zero deals.
So how can you look out for retrading before you sign an LOI?
The best thing you can do if you’re exploring a deal is to simply ask the potential buyer directly if this is something they do. Then check their answer with references from other Founders who have sold to them. While deal particulars are likely under NDA, you can ask references if anything in their deal terms with the buyer changed significantly leading up to closing.
As you’re evaluating an LOI, It’s also possible to write some requirements into it to help you avoid retrading. For example, let’s say a buyer gives you an LOI with the planned period leading up to closing set at two months. You could have your lawyer write into the LOI that all deep due diligence on tech needs to be done within a certain timeframe, and that any proposed changes to the LOI terms must be made within two weeks from signing the LOI.
Due diligence will obviously continue after those two weeks, but this can help ensure that a seller is going to hear about any major concerns or issues early in the process, not 3 days before a planned closing.
Bottom line: expect due diligence, but beware of retrading during a SaaS business sale
Knowing about the practice of retrading, how to tell if a buyer engages in it, and what to put in your LOI to prevent it are the best steps you can take to protect yourself from facing this situation when you sell your SaaS (or any type of business).
