The sale of a company is typically not one negotiation, but a series of negotiations – from negotiating the confidentiality agreement, to negotiating the term sheet and then the Sale and Purchase Agreement. There are often unexpected negotiations mid-course as well, such as may be necessary when the seller’s company does not meet the budget, or there is a currency exchange fluctuation or loss of a contract, which changes the value of the company. Negotiation is therefore one of the key competencies required for anyone selling a company, particularly for M&A professionals. And yet, at times I am shocked at how much money people leave on the table, simply through being unaware of, or not practicing, basic negotiation techniques. What are some of these techniques?
1. Before negotiating key points, get to know your negotiating partner
Ask lots of questions. What makes your investor tick? Why does he want to invest in your company in particular? What are his emotional drivers? What are his thoughts on the timing of the transaction? Has he made any acquisitions in the past? (If so, you might find out their valuations.) What is their internal decision-making structure? Who really calls the shots? Ask yourself whether this is the type of person or investor to whom you’d want to entrust your company.
2. Let your negotiating partner make the first offer
Always, without fail, seek to encourage your negotiating partner to make the first offer, on any particular issue. This often brings surprising results. Your negotiating partner, for example, might value your company at more than what you thought it was possibly worth.
3. If you must make the first offer, make it at the highest end of the defensible spectrum
If purchase price is what you are negotiating, for example, then start with the highest price you could conceivably defend for the sale of your company. Don’t be shy!
4. Concede in small increments
If you concede in large increments, your negotiating partner will sense a capitulation. By conceding in small increments, and even smaller increments as you go along, your negotiating partner will get the signal that there is not that much room for negotiation.
5. After asking a crucial question, hold your tongue!
Silence is uncomfortable. It creates a vacuum and nature abhors a vacuum. It’s amazing how many times, after I ask a key question (e.g. what is your valuation of the company?), there is a long silence. My own client has even answered the question, rather than the investor, so discomfited was he by the silence. A friend of mine, also an M&A advisor, developed a habit of stomping on the foot of his own client whenever his client spoke out of turn – until he broke the toe of his client! Of course, I am not advocating physical violence, but perhaps the story drives home the importance of staying silent at important junctures.
6. Every term of the deal also depends on every other deal
There are dozens, if not hundreds, of points that must be negotiated in an M&A transaction, in addition to price: scheduling of payments, representations and warranties, salary packages, non-competition agreements, to name a few. For example, stricter representations and warranties will warrant a higher price, and vice-versa. So do not get boxed in by agreeing to a certain price, only to find that the investor is negotiating an excessively stiff set of representations and warranties. You can use the above techniques for each of the many points to be negotiated in the course of selling your company.
Negotiating techniques will take you part, but not all of the way, in negotiating the sale of your company. These techniques are little tricks of the trade that help you improve price, terms and conditions. But one issue that you may wish to ask yourself even before applying the above techniques: is this an investor to whom you would wish to entrust your company? Might there be reputational risks to you by completing a transaction with a particular investor? Is he likely to honor contractual agreements, such as for deferred payment? Is he likely to be litigious, for example on representations and warranties? If you apply the negotiation techniques well, but fundamentally misjudge character, you may win the negotiation battle (e.g. close your deal), but lose the war.
