AxialMarket / Blog - 8 Negotiation Techniques When Buying & Selling Companies

AxialMarket / Blog - 8 Negotiation Techniques When Buying & Selling Companies

by peter on May 27, 2010 in buying a company, m&a, negotiation, selling a company

If you want to negotiate like Herb Cohen, it’s going to take time, talent, homework and practice. But on the heels of Inc. Magazine’s useful article on negotiation tactics for entrepreneurs, we wanted to write an article sharing key negotiating techniques and resources that are crucial for success when negotiating a business investment, growth capital, or M&A transaction.

Since buyers seek to buy companies at the lowest possible price and most favorable buyers terms, and business owners and entrepreneurs are looking to realize the fruits of their labor by maximizing price and favorable seller terms, negotiation skill is critical to completing any significant financial transaction.

Despite the tension of the two sides’ respective goals, there is always one critical goal that buyers and sellers share: getting a deal closed that benefits them and their stakeholders.

To that end, here are eight negotiation tips and techniques that we’ve found can help entrepreneurs, investors and strategic buyers accomplish their common goal: closing the deal.

1. Remember: Price isn’t everything—When it comes to the sale or purchase of a company, it’s very easy to fixate on the price. It’s a key piece of the negotiations, but hardly the only one. The terms matter too. If it’s not a full sale, what stake is being transferred? How much control? Does the buyer get the first refusal for future transactions? Does the sale agreement provide the buyer with any recourse against the seller if costly problems arise immediately after the transaction? Is there any seller financing? By creating many terms beyond just price, buyers and sellers can find out what are the top priorities for the other side, and this allows both sides to ultimately make concessions to the other to keep the deal moving forward. Perhaps the seller is comfortable with an earn-out provided the buyer is willing to pay a higher price. If you don’t put an earn-out term on the table, the deal might be off.
2. Make Concessions Strategic—”Concessions are often necessary in negotiation,” says Harvard Business School professor Deepak Malhotra. “But they often go unappreciated and unreciprocated.” Malhotra offers four strategies to make sure your concessions are returned in kind. First, make sure that your counterpart is aware that you have given up something of value. Second, define how your counterpart can return the favor. Then demand it. Third, if you don’t trust your counterpart to reciprocate, make a contingent concession. In other words, offer to yield on something only if the other side meets a certain condition. Fourth, make concessions in installments. Malhotra points out that people are happier to find two $10 bills on consecutive days than one $20 bill. We like our good news spread out, including in negotiations.
3. Know your “walk-away” number—A buyer or seller needs to enter negotiations with an understanding of the reasonable range in potential sale prices for the asset. You should know what’s the highest and lowest price the asset could reasonably sell for. Just as important, buyers and sellers must know their “walk-away number”; this number is your final threshold for consummating the deal. This will depend on your BATNA, or Best Alternative to a Negotiated Agreement. Knowing your walk-away number going in takes research and preparation, and sticking to it will help you stay disciplined.
4. Know whom you’re negotiating with—In order to get the other party to agree to a deal, you need to intimately know what their interests are. Getting To Yes, one of the “Bible” books on negotiations technique, recounts that the 1978 Camp David negotiations started with Israel and Egypt positing irreconcilable claims to the same piece of land. It was only when the sides recognized the other’s real interest—Egypt’s wanted its previous borders and Israel wanted its security—they were able to realize an agreement both sides could accept. Egypt got the land but promised to demilitarize it. Also remember that there’s a distinction between your negotiating counterpart and the organization they represent. His or her compensation structure and career goals could be playing a role in their decision-making. Understand what’s driving him or her and you increase your bargaining power.
5. Making the first offer isn’t always a bad thing, it’s often a good thing—You’ll often hear the advice don’t tip your hand, let the other guy show his cards and make the first offer. But there’s a clear advantage to making the first offer: it anchors the discussions. Studies have shown that the first named price in a negotiation significantly influences subsequent prices in the discussion. There is a caveat: this strategy is especially useful when you are confident you have an information advantage in the negotiation. If you’re not in that position, playing coy might be the ideal strategy to avoid low-balling yourself. (For those curious about research on the subject the academic paper “First Offers as Anchors” is an enlightening read).
6. Not getting to yes—As negotiations progress, it’s easy to get tunnel vision. So much time has been spent and effort has been exerted, how can you walk away empty-handed? Sometimes you have to because that’s the best option. As was already pointed out above, it’s important to know your alternatives and walk-away number before you enter the negotiations.
7. Shake hands, then second guess – After the deal is done, second-guessing can be helpful. Research has shown asking yourself what more could you have done following negotiations can make you more effective. A 2009 study from professors at Haas, Kellogg, and Ohio University found that the second guessers learn more and perform more effectively in the future. Not all self-reflection is equal though. The experiments found it’s better to think about what else you should have done rather than what you did but should have avoided. “Particularly effective negotiators learn from experience by mentally adding rather than subtracting from reality,” wrote the researchers. (You can find a PDF version of their paper here.)
8. Research, research, research—As a number of the tips above already suggested, the buyer and seller need to walk into negotiations after doing their homework. You need to research the asset, its value, your negotiation counterparts and other textbook (and non-textbook) due diligence items beforehand.

For those curious to read more about negotiations, the aforementioned Getting To Yes by Roger Fisher and William Ury is an accessible and useful primer on the topic. And Harvard Law School’s Program On Negotiation has a blog and free newsletter. Some of the work of Adam Galinsky, the Professor of Ethics and Decision in Management at Kellogg School of Management was mentioned above. His profile page contains links to a number of his studies and articles on negotiation.