I’ll Have Mine Without Chips, Please!

Insights by Robert Fiske.

We are often asked about how confident one should be about a buyer honouring their offer up to completion.

The primary concern here is about what is frequently referred to as ‘price chipping‘. The typical question is: is this common and what can I do to prevent it?

Well, it can happen but it shouldn’t be common – and certainly not if you have got the right advice and done the right things leading up to the due diligence phase. As with so many things during an M&A process, preparation is key to getting this right. I mention the due diligence phase as it is usually here that price chipping occurs – ie. after you have signed a Heads of Terms and when the buyers are crawling over the detail.

An unscrupulous buyer could tempt you into proceeding with a deal by offering an amount and/or structure that they have little intention of committing to. They then find any excuse (however spurious) to reduce the price once you have accepted their outline offer. But the fact of the matter is that we rarely encounter this with deals we are involved in – and that will be in no small measure due to the process that leads to the offer in the first place. Clearly, it would be legitimate for a buyer to chip if they discover something material that you have not disclosed to them, or if something adverse happens to the business after they made their offer (eg. loss of a significant contract or other material downturn in performance). Aside from these more dramatic scenarios, chipping should not occur – and if it does, should be rigorously challenged.

Suffice to say, to prevent giving cause for chipping, it is really important to paint an accurate picture of the business in the first place. We actively advocate getting any ‘dirty washing’ out in the open as early as possible so it cannot be an excuse for price chips later on. When working for buyers, we do sometimes come across vendors who try to obscure some negative factors. This is almost always counterproductive as the due diligence process is pretty forensic and the issues are sure to arise at some point. When they do, the buyer may well have cause to chip as the information that has just arisen was not disclosed to them at the time they made their offer, thereby they will feel they have been misled.

There are other factors around preparation other than accurately presenting your business from the outset (by way of data and other information given). This will particularly include getting the detail right in the Heads of Terms. A woolly Heads can leave open all sorts of possibilities for what may be outright price chips but could also lead to unexpected changes arising from misalignment of expectations – perhaps due to inherent ambiguities or just the lack of specific detail in the first place.

Should you be considering going it alone, we would strongly advise not doing that unless you are genuinely experienced at this. We frequently warn of the ‘unknown unknows’ in an M&A process and it is all too pertinent here. Get good advice in regard to how you present your business in the first place, what information you disclose, how to manage awkward aspects (eg. things you know will be negatively perceived), and very importantly, how to structure a Heads of Terms that will adequately protect you. Finally, you also need to know how to manage the process from that point and what should be defended and what might legitimately be conceded to get the deal done.