The Private Equity Grind Down

Every industry has its own "Grind Down". Perhaps it goes by another name, but our firm refers to a "Grind Down" as a negotiating tactic that occurs in deals when one party or the other at the last minute tries to achieve more favorable terms for itself or threaten to back out of the deal at a time so late in the game that the other party cannot find another transactor.

Most homeowners have experienced the common retail mortgage grind down where when you go to buy a house and the deal is about to happen that the lender has some funny stuff fees in the transaction that you must pay. It is too late to find another lender and failure to go through with the deal opens up the property to another buyer. The other common grind down is from one party who asks for excessive concessions after the inspection and then threatens to back out of the deal if those concessions are not met.

In any deal, particularly private equity negotiations, there are lots of Grind Downs. One way some firms put the press on their portfolio companies is by not letting other co-investors in the deal. In the initial investment the firm promises to feed the startup until a liquidity event. These assurances allow that investor to be the sole investor and prevents the need for the company to deal with multiple investors. However, inevitably the company burns through that round of cash and needs another round of funding. The investor presents a term sheet and drags on signing it until the company is nearly out of cash. Suddenly, they must change the terms of the term sheet and so the company must sign the deal with those terms otherwise become insolvent.

As in any transaction it is imperative to create a market for your investment so that you can get a competitive price.

Comments

[ronald gross]

Sir: I find myself in the situation you described in the post and am wondering what strategies that offer some solution. The differences is that the funding was prior to 10/08 and we have a committment of $140MM that the investor wants to cancel- and is withholding operating funds while we negotiate.

Please let me know your thoughts via email, if convenient.
Thanks for your time and attention.
Ron Gros