No two negotiations are exactly alike. A skilled negotiator in one setting will not necessarily be expert in others. This is generally due to a lack of familiarity with the subtle complexities involved in that specific type of negotiation, which might be outside the scope of the negotiator's experience. Think about the differences in these negotiations:
Determination of the selling price in a supply contract between a customer and vendor where the two have a continuing relationship.
These four negotiations are as different as night and day. The differences include the prior relationship between the parties; necessity for the continuity of a relationship after the completion of the negotiation; degree of interdependence between the parties; and replaceability of a party in the case of deadlocked negotiations. However, the most significant differences are the variables and factors the parties use to generate leverage over each other.
Acquisition negotiations are unique for several reasons:
It's a one-time contest between the parties.
The two parties possess disproportional strength and power, as the acquirer is usually much larger and has considerably more clout in the marketplace.
The acquirer is usually much more familiar with the acquisition process.
These factors make it mandatory for a selling owner to find a way to level the playing field. Negotiating an acquisition is an art, not a science. It's the art of exerting pressure on one's adversary through maximum utilization of all available leverage points. Negotiations are a test of wills and the ability of one person (company) to impose his or her will on another. The following nine critical points can enable a selling owner to level the playing field and achieve success in negotiations.
Do not avoid confrontation. Negotiations are confrontational by their very nature. While it's absolutely essential that selling owners recognize this and not attempt to avoid necessary confrontation, they should never instigate it, either. Successful negotiators convey that their will is going to prevail without demeaning their adversary. They should be demanding and controlling, but in a positive way. Unfortunately, confrontation is usually provoked because large acquirers often demand more than they have a reasonable right to expect. However, if you are knowledgeable about your situation, realistic in your expectations and stand your ground, you should be able to sustain your position. Acquirers will usually resent your strength, but they will respect you for defending your position.
Stay focused on your primary goal. You must stay focused on achieving the primary objective(s) of your negotiating strategy. Don't become obsessed with secondary issues. Many a negotiator has failed because they became obsessed with winning a specific battle. To achieve the ultimate success, you must remain single-minded in purpose to achieve your primary goal. Rarely is a war won where one side wins all the battles. My firm has an unwritten rule that we never make an unjustified price concession after a transaction price has been established at the letter of intent stage. However, in a deal for a West Coast electrical distributor, the acquirer demanded an unjustified price reduction after the letter of intent had been executed. No substantive reason was given. The selling company had many vulnerabilities that had been camouflaged from the marketplace. In addition, the acquirer's original price was considerably in excess of the expected transaction price. No other acquirer had made an offer that even equaled market value. Correspondingly, and in violation of my basic principle, the seller grudgingly accepted the price reduction, which was still 4 percent over the expected transaction price. Although the selling owner lost the battle, he won the war as the transaction price was in excess of market value.
Be realistic about your company's potential and liabilities and set your asking price accordingly. You should be aware of all major issues impacting the acquisition and must understand how the business foundation (the major issue in your company's future), translates to an aggressive, premium market price. That being said, you must be able to intelligently answer the acquirer's questions about your company and its future prospects. When sellers can do this, it reinforces their credibility with potential acquirers because they see the seller is in total command of the situation. This should enable sellers to obtain the control necessary to sustain the maximum acquisition price.
Before entering negotiations, define a realistic but aggressive expected transaction price and an acceptable bottom-line price. After you establish these parameters, set an asking price. Be prudent and set these price targets so they allow a reasonable level of movement between the asking price and expected transaction price. This will help you obtain your ultimate objective of selling the company without demeaning opposing negotiators by making them feel like they were bludgeoned. Once you establish your pricing expectations, don't make a deal until this price is obtained. If the deal does not evolve as quickly as you like, be patient. In certain situations, deals only happen when they are ready to happen and acquirers only move when they are ready to move.
Several years ago, I sold a truck parts distributor in the southwestern U.S. Although the transaction was not consummated for more than two years, when the deal was done, the selling owner received a fully-priced, all-cash deal with minimal exposure to post-closing liabilities.
Obtain and maintain control. From the first meeting, both parties are trying to obtain control and dominance of the negotiations. The establishment of control will accrue to the party that has mastered the complex psychological factors underlying an acquisition's negotiation. The party that initially establishes control gets momentum. Once this occurs, the controlling party is generally able to obtain the majority of concessions, and usually the most important ones. In addition, once a party gets control, it's extremely difficult to reverse the roles.
Utilize leverage from multiple acquirers. Do not provide an acquirer an exclusive look. Your objective is to obtain offers from all potential acquirers as close together as possible. The leverage from these competing multiple offers will help put you in control of the negotiations. It might precipitate a bidding contest that produces a price in excess of the expected transaction price. My firm recently represented a machine-tool manufacturer. As we were in final negotiations on a letter of intent, one of the losing bidders reinstituted contact. I told them to make an offer within 24 hours that I couldn't refuse. Subsequently, they offered a price that was 15 percent in excess of the expected transaction price. Only the participation of multiple acquirers with acceptable offers enabled the realization of this transaction price.
Control all of an acquirer's contacts with vendors, customers and employees. No such contacts should be instituted until after a letter of intent has been signed. In fact, to the extent that you can reasonably limit the contact between the acquirer and these parties at any time, it will be helpful in minimizing the disruption to your company. However if an acquirer feels these meetings are essential, try to be present at all meetings. Unless your presence in a particular meeting could reasonably be construed as an attempt to restrict the free flow of information, make it your business to be there. When an acquirer wants to meet these parties, ascertain what they are trying to learn. You should then adequately prepare these parties for the meeting. This does not mean you are trying to stage manage the meeting. Instead, it reflects your intention to preclude any parties not thoroughly familiar with all aspects of your operation from providing erroneous or misleading information.
Know your adversary. Obtain as much information as possible about the acquirer, the company's business results and the outside advisors and key executives involved in the negotiation. Also attempt to determine the acquirer's motives and strategic needs that the acquisition can satisfy. Assess the personalities of all participants on the acquirer's negotiating team. You should try to determine the motivating factors of these participants — both their personal and group goals. Unfortunately, the participants often have different personal objectives than the acquirer's group goal. If you are unaware of the participant's self-interests, their actions might surprise you and possibly derail a deal. Therefore, the definition of the participant's personal goals is of critical importance to a selling owner. You can then develop a negotiating strategy that enables you to defuse the impact of personal goals that conflict with group goals, thereby substantially increasing your likelihood of success.
In a recent deal that my firm consummated for a pipe, valve and fittings (PVF) distributor, I determined after the initial meeting that the acquirer had a desperate need to obtain my client's top market position in their trading territory. I sensed they wanted it so badly that almost anything could be obtained. Consequently, I was able to extract a price that was 9 percent in excess of our expected transaction price. In addition, the reps and warranties were so lenient, and provided my client with absolutely no post-closing exposure, that the acquirer's attorney said as the definitive purchase agreement was being negotiated, “We don't do deals like that.”
I suggested to the acquirer's senior vice president handling the transaction that he clarify our deal for his counsel. The senior vice president said, “Those are the terms I agreed to, or I would have lost the deal.” Only by knowing my adversary was I able to sense that a price and deal terms which otherwise would have been unrealistic to expect could be obtained.
Do not divulge unrelated or unnecessary information. Do not allow your ego to get out-of-control. Stick to the basic facts about your company of interest to the acquirer. Do not unnecessarily stress your personal accomplishments and interests or discuss your specific plans after the deal. It's also a mistake to exaggerate or emphasize your importance to the company. Even if you are going to work with the acquirer for a period of time, the acquirer is most concerned about how profitable the company will be after you leave. Consequently, stick to the specific attributes of your company, its products, market position and any other relevant information the acquirer wants to know. Many novices unnecessarily derail deals by the disclosure of seemingly insignificant facts.
Don't play games. A direct and straightforward negotiating approach is most likely to result in successfully consummating a deal. It will facilitate the development of trust and respect amongst the parties. In fact, this candid method of approaching a deal exudes the strength you want to convey. Game-playing during negotiations does not generally produce successful results and instead tends to be counterproductive. Games are self-perpetuating and usually expand to permeate all aspects of negotiations. They further complicate an already complex situation. The avoidance of games will significantly increase your chances for success.
Business is increasingly conducted on a global basis, and it's likely that the acquirer will be a large national or multi-national company. The adherence to these nine key negotiating points will level the playing field for middle-market owners that want to sell their businesses. Their familiarity with the intricacies of the negotiating process and ability to expertly execute these points will determine the likelihood of achieving success.
George Spilka is president of George Spilka and Associates, Allison Park, Pa. The firm specializes in mergers and acquisitions. The author's Web address is www.georgespilka.com. Reach him at (412) 486-8189 or by e-mail at [email protected].