Considering an External Sale? How to Conduct Successful M&A Negotiations
Although buyers and sellers frequently see themselves opposing each other, they share one common aim: close the deal. Since buyers want to purchase businesses for the lowest possible price and buyer-friendly terms, and sellers seek to maximize the price and the most favorable terms, skillful negotiating is essential for the transaction process. Read further to learn some practical strategies for dealing with corporate mergers.
1. Anticipate potential issues.
Setting prices when selling or buying a business requires little effort and is a crucial focus of discussion, but the terms of the sale are critical, too. Before entering a negotiation, ask these questions to determine whether the terms best suit your interests:
- Is it a full sale? If not, how much stake is being transferred?
- How much control will the buyer have?
- If the sale confers partial ownership, does the buyer receive the first refusal for future transactions?
- Do the sale terms allow the buyer any recourseÂ in caseÂ costly problems appear immediately after the transaction?
- Is seller support available?
Buyers and vendors can and should work out specific terms beyond the price. This helps them compromise with the other party and keep the agreement on track.
2. Know the opposition.
You have to know the other party’s priorities to negotiate a deal and yield concessions to the different party values. One classic book on negotiating strategy, Getting To Yes by Roger Fisher and William Ury, recounts that the 1978 Camp David talks began with Israel and Egypt staking irreconcilable claims to the same piece of property. Only when the parties realized the others’ priorities–Egypt wanted its former borders, and Israel wanted security–could they come to an arrangement agreeable to all parties. Egypt got the ground but vowed that it would be demilitarized.
Knowing what makes or breaks the deal for you takes research and preparation. You should know what the highest and the lowest prices of your businessÂ and its assets are.
3. First is better, occasionally.
Sometimes, you will hear advice to let the other party make the first bid. However, having the first bid confers a decisive advantage: it anchors the negotiations. Studies have found that price affects subsequent values substantially in the debate in a deal. When you name your price, there’s value in precision. One caveat: when you are sure you have the advantage in intelligence, this approach is constructive. Playing coy may be the perfect tactic to stop lowballing yourself.
4. Ignore sunken expenses.
It’s natural to have tunnel vision as talks proceed: How can you come away empty-handed? So much time has been expended and work exerted–and your time and effort have value. Occasionally, however, walking away from the deal is the best choice. Know your alternatives and walk-away number before joining the talks.
5. Prepare to walk away.
If the contractual terms are disadvantageous, you must be prepared to walk away. It’s easier said than done, but sometimes essential to conclude negotiations. Know what your price is before you start. Be ready to justify your price based on market evidence and leave the table if the other side will not concede. Your readiness to end the negotiation without closing the deal may spur the other party into agreeing to your price and terms.
According to Deepak Mahotra, a professor at Harvard Business School, compromise is often necessary for negotiation. Make sure your counterpart understands that you’ve given away something of worth. Second, describe the concession your want and ask for it. Third, if you don’t trust the other party to follow through, make a contingent concession. In other words, agree too to the compromise only if the other side follows a specific condition.
7. Listen to the other side’s questions and opinions.
The best negotiators listen to the other side, consider their main challenges and hot buttons, and formulate an acceptable response. Try to think about what is relevant, what weaknesses they may have, and how scalable they can be. Don’t discuss them ad nauseum or risk fixing those issues in the other party’s mind as make-or-break terms of negotiation.
8. Observe the Golden Rule.
In blunt terms, don’t be a jerk. No one ever wants to do business with someone malicious or confrontational. After all, you may wish to do business with that party again, even after the negotiation has concluded, or the deal might entail the other party’s continued participation in the business. One goal of negotiation should be to build a firm, long-term partnership. In other words, a constructive, optimistic tone is likely to lead to a mutually satisfactory close.
9. Time is the enemy of many purchases.
The longer it takes for an agreement to be reached, the more unlikely it will happen. Urge your lawyer to expedite the paperwork to keep the transaction dynamics going. Haste makes waste, so don’t hurry into talks without the necessary information and make unnecessary compromises. Understand when you have time on your side and when time could be your actual opponent.
10. Entertain multiple options.
Sometimes, competitive solutions strengthen your bargaining stance and allow you to determine the best way to proceed. The best scenario for the seller is to have many prospective bidders at the table. With multiple offers, you can secure the best possible rates and conditions. Likewise, the seller is better off considering alternatives if they want to purchase a commodity, rent premises, or secure a loan for a company because the other party knows it has viable rivals. You will also achieve better deals and better financial arrangements by bargaining simultaneously with two or three parties.
11. Don’t get stuck on one issue.
To avoid an awkward dilemma, say that, for the time being, a dispute is settled so both sides can make progress on other matters. Later, outside the heat of the negotiation, you can revisit the issue and suggest an innovative alternative.
12. Don’t take the first offer.
The first bid from a buyer is seldom the final bid. Consider countering an initial bid with a higher price. If a seller accepts an initial bid, the buyer may believe they overpaid for the business and suffer buyer’s remorse, leading to the buyer wanting to get out of the bargain. Most buyers undercut their highest acceptable prices by up to 15% in their first offer.
13. Determine who makes the decision.
You need to know if the other party with whom you deal is the ultimate decision-maker. Lengthy discussions with someone who cannot agree to any terms are a waste of time and effort.
14. Ask questions.
Don’t be afraid to ask the other party questions. The replies will be informative, not only in the form of information given but also in what is not said. Sample questions include:
- Can you make a better offer?
- What guarantees do I get that I am working for your product or service?
- Who are your competitors? How do you compare your products/services to theirs?
- What more would you do for us free of charge?
- What is your timeline to close the deal?
15. Get support from experts and advocates.
You want actual experts from your side to support you during the negotiation and draw up the contract, especially if it’s a huge or complex transaction. For starters, it is generally worth the money to employ an investment banker who knows your industry and has experience with prospective clients when you sell your business. When doing an activation deal, you want an experienced attorney who has negotiated several M&A agreements in the field you operate.
It takes time, talent, research, and experience to learn proper negotiation techniques. However, when trying to close a company acquisition, growth capital, or M&A deal, these negotiation tips can help buyers and sellers progress toward a mutually advantageous, successful deal.