12 minute read
Negotiating the best price for your business is key when research shows that more than half of the companies in the UK are undersold. They do not achieve maximum negotiated value – they only secure financial sale value. Surprisingly, the cause of this is not always sale preparation or the company itself, but the way in which sellers and their advisors tackle the negotiations. Invariably, negotiations go wrong due to insufficient preparation – but by structuring win-wins, understanding your ‘tradeable’ elements, considering and planning for a variety of scenarios, walking in the buyers’ shoes and preparing your own state of mind you should experience a smoother ride. M&A negotiating is a complex environment, combining multiple components including finance, legal, commercial, cultural and, of course, emotions. There is an art, as well as a science to successful deal negotiating and here, are our top tips:
Some leaders do not enjoy negotiating. The process usually requires ‘trade-offs’ (which just does not seem right?) and understanding who you are and how others see you – this is vital in successful negotiations. The more you can get people to follow you, the better negotiator you will be. Be positive and enjoy the process – do not judge people and their points of view, avoid closed minds and high emotions, and always keep calm.
The four M&A negotiating elements
There are 4 fundamental elements to M&A negotiating – value, deal structure, risk allocation and timing. The deal will seek to balance sustainability, cash generation and risk against the specifics of the business but establishing value is notoriously difficult. If the accountants lead, you will lose the deal and if the visionary CEO controls, then enthusiasm may lead to bust as was the case with Microsoft’s ill-fated purchase of Nokia for $7 billion in 2014.
Deal fever may also skew some of the elements – in M&A negotiation this can occur when you have so much time, energy and emotion tied up in a deal that your focus shifts from doing the right deal, to simply getting a deal done. A great example of this is when Sir Fred Goodwin, the CEO of Royal Bank of Scotland (‘RBS’), overpaid for the Dutch bank ABN Amro, after winning a bidding war with Barclays.
Put yourself in their shoes
An important part of negotiating is being able to understand the positions of all parties – if you can think like the other party, you can often improve outcomes. Additionally, it is key to maintain an impartial mindset, effectively that of the observer. When your approach can encompass your own position, that of your counterpart and that of an observer, you create a far better understanding when participating in M&A negotiations.
M&A negotiation is very similar to the game of chess – a game that is all about understanding your resources, the pieces, and the possible moves that can be made with each. In chess, the more moves you can successfully compute ahead, both your own and anticipating those of the other player, the more likely your chance of success. It also requires an overall game plan, albeit adapted step-by-step, practice and having a good coach.
There are also elements that are not dissimilar to poker – a game of chance based on the hand that you are dealt. How you use that hand can determine the outcome and anticipating who will call a bluff, or be able to hold a bluff with a straight face, is vital.
We have used gaming as a comparison to M&A negotiating for one final reason. Many people view the act of negotiating as adversarial. They use words like ‘my argument’ and they see it as their job to win their points over the opponent. Yes, we all want to win, but is it not a better outcome if the other player wins as well? M&A is best handled with a sporting code of conduct.
Know what you can trade
The key to the tradeable concept is to not allow the other party to know the true value of each trade and therefore to concede small points to win the big ones – ideally, to trade unequal value items and to be creative. With just a little work in advance, you can build up a tradeable bank that could be of real value to your counterpart in the deal. All successful deals require compromise on both sides. History determines the true winner of any M&A negotiation, although we may arbitrarily judge it at completion by the party that conceded the smallest points or losses for the most significant wins to secure value.
Whilst we may employ tactics it is also important they are recognised. Common moves include third-party referral always back to a higher party, tactics of confusion by fussing over unimportant aspects to hide the bigger points, shock opening bids, and last-minute hurdles just before the money move when many do not have the will to walk away and even sweet hearting. Tactics that work in one deal will be hopeless in another, so be flexible – all people react differently.
Your research should create a deep observation of the counterparty – from ‘Linkedin’ to researching previous transactions and understanding, not just the company but the individuals you are working with. What is their reputation, their track record, the names of their family members, and their favourite sports? Do they play hardball or charm? What is their favourite tactic? Bluff, persuasion, distraction, confusion or third-party referral? Ego can also be an asset so observe carefully to understand what motivates, defines and drives the counterparty – knowledge creates leverage. Passive observation is also critical – understand what the silence or body language tells us?
Whilst the human species is the same the world over, different societies have different beliefs and values, and this has a material impact on the way we build agreements. In the UK, one of our cultural habits is the ‘no, no, yes’ move. To international counterparties, this must be thoroughly confusing and frustrating as for most it’s either yes or no, and in India ‘yes’ is a shake of the head, and ‘no’ is rarely heard without a walk-away, as you cannot carry on talking. In Japan, the businessman represents his company, which is part of his group, and which ultimately is viewed as representing Japan. This means the individual straight talker will fail and respect to create an agreement can only be earned as a group. Always be aware of cultural differences.
Many negotiations are lost via the deadly spreadsheet. Buyers will need to evidence any risk they may discover with the correct facts and figures to support the case. Sellers will carefully check the evidence, although it may be better to fix the risk or challenge rather than to reduce the value or warrant. It depends on the circumstances.
Perception can be reality. We recently saw a case where a private equity buyer had made a better bid than a trade buyer but because in early discussions their approach had been all about dry fact-finding and analysis they lost. The trade buyer presented with passion and a vision that won over our clients. Our clients, the sellers, are now drowning under reams of reports and corporate structure that has been layered on them by the trade buyers.
Timing – when?
Time in M&A can have positive and negative impacts. Time can allow people to reflect and agree or it can lead to fatigue and negative interpretation. Deadlines are required to create momentum, but they may also be used as ultimatums. If we compromise too early, we may appear too keen – if we wait too long to react, we run the risk of appearing uninterested!
The ‘Letter of Intent’ or ‘Heads of Terms’
The letter of intent sets out the key commercial terms between the parties – but is not legally binding apart from exclusivity, costs and confidentiality clauses. The document should concisely set out the main terms and should set the tone of a transaction to then drive both due diligence and the agreement of final definitive contracts. The aim of the letter is to establish clarity and trust between the parties, as well as removing ambiguity and avoid time-wasting and debate later on. Producing a high-quality letter of intent always pays and it is worth delaying transactions until there is mutuality and clarity.
‘Guanxi’ (pronounced ‘Gwon-she’) is the Chinese concept that relationships and your network impact heavily on your negotiations and trust. This Confucianism value places significant value on interpersonal relationships and creates an obligation. Trust is built, not because you signed a binding contract, but because ‘guanxi’ obligates. As Aristotle said, “the fool tells me his reasons – the wise man persuades me with my own”.
Avondale is a leading business sales advisor that helps ambitious owners buy and sell companies, secure investment, grow their business, and enhance shareholder value. Audacious, authentic, and ambitious partners of exceptional quality, delivering your success. We have been advising dynamic global entrepreneurs and companies for over 30 years.
If you are looking for advice or an exploratory discussion without obligation for your “perfect” trade sale please contact us on +44 (0)1737 240888, our Contact Us page or email email@example.com for further information? Alternatively, you are invited to join our next webinar “Negotiating the best price for your business” on the 21st of July 2022 by registering here.