How to Negotiate an M&A Deal and Not Screw It Up

Few business activities are as high-profile as negotiation.  Without negotiation, you probably don’t have a single TV show or movie that covers the topic of business or law.  Imagine Boston Legal without negotiating.  You basically get 40 minutes of sex, James Spader making various political speeches and William Shatner making oblique Star Trek references.  Take negotiating out of Wall Street, and Gordon Gekko is basically a garden-variety hedge fund trader (granted, we didn’t have hedge funds per se in the 1980s but you get the idea).  Take negotiating out of Star Trek: the Next Generation, and Captain Picard is a sissy who doesn’t even have the right accent (or did England ultimately conquer France by the time the 24th Century rolled around?)  Even Lex Luthor negotiated a real estate deal in Superman II.

So, we tend to view negotiating as pretty important – and it is.  Many of us negotiate for housing, for cars, collectibles, and so forth.  But somehow, when it comes to business, we look at negotiating differently.  In the world of mergers and acquisitions (and, to a lesser extent, venture capital), the stakes in negotiations are as high as they get.  Negotiate too softly, and it can cost you millions of dollars.  Overplay your hand, and you let a great, life-changing deal go by the boards.  Either way, you’re probably headed to the bar, wondering what might have been.

At the same time, we can overcomplicate negotiation.  You can learn all kinds of tricks to help you become a better negotiator.  There are plenty of books, videos and seminars that will teach you to be a better negotiator.  You may find those materials helpful.  You might believe that only certain, A-type personalities can negotiate well and the B-types simply get run over.  This isn’t true.  Many introverted, consensus types are very good negotiators.  Maybe you look at negotiations like a game of poker, or chess.

Ultimately, successful negotiating is about two things – asymmetry of information and knowing your walk-away point.  Relative information advantage and knowing your limits to doing a deal are far more important than body language, or speaking vs. not speaking first, or other tricks.  If you don’t have good information at your disposal and don’t have a good sense of when you need to walk away before negotiations even begin, you are taking a knife to a gunfight.  Having good advisors on your team balances the odds considerably.

Information is Strength

Information asymmetry represents a huge imbalance in the negotiation dynamic.  Your counterparts may have much more knowledge of the M&A or investment markets than you do – particularly if you are the seller (of the company or the investment).  Buyers frequently have bought multiple companies, and investors often have made many investments, and consider hundreds more.  Buyers and investors see much more of the market than do sellers, and this confers a huge advantage to the buyers.  Investors and buyers walk in with knowledge of what they might get from other sellers if your particular deal doesn’t work out.  Sellers often don’t have such market knowledge – in large part because sellers are often doing the first (or even only) such deal in their lives.  The advantage that market knowledge conveys cannot be overestimated.  By virtue of being frequent and active participants in their respective markets, buyers and investors have visibility into market pricing, terms, trends, and conventions, which positions them to correctly distinguish a good deal from a bad deal.  Companies and investors who do deals with sufficient frequency maintain full-time corporate development staffs comprised mainly of market experts.  This information advantage not only translates into deal recognition, but also to an ability to convince you about the “correctness” of their offer (“Look, I do deals all the time and I can tell you you will not do better than this…”)  Even though your counterpart clearly has interests that are in conflict of your own, you can be so thirsty for that market knowledge that you start to identify with him in the negotiation process because they represent the most credible potential source of information.  In effect, this creates a kind of Stockholm Syndrome and all too easily puts you in a position to make a bad deal.

Not all buyers or investors enjoy an information advantage.  Everyone has a first time when they buy a business or make an investment.  Buyers can also be on the short side of the information imbalance.

When to Walk Off the Lot

Establishing a walk away point is supposed to be your emergency brake.  When you walk away from a deal, you are saying, in effect, “The likelihood of achieving acceptable terms in this transaction is so low that it’s no longer a good use of my time to engage in the negotiation.”  That’s a strong statement, and one that can be very hard to do in practice.  Relative walk-away points are a direct function of leverage.  In one extreme, you could have an “infinite” walk away point because you have compelling leverage – say a law, regulation, a threatened lawsuit, or financial scenario is forcing your target to sell.  In the other extreme, yo could have no walk away point because you have no leverage – you effectively must sell.  At either extreme, the term “negotiation” is a misnomer.  If you are considering buying a company that must sell, you are simply making demands.  If you are selling a company that must be sold, you are making requests.  Anything in between represents a true negotiation with buyers and sellers at various leverage points.

Establishing the appropriate walk away point requires correctly assessing the relative leverage between buyer and seller – again, often a function of market knowledge and information.  Walk away too early, and you leave a potentially great deal on the table.  Walk away too late, and you waste a lot of time.  Fail to walk away when you should, and you likely regret that deal for a long time.

Get Help

Generally, you can’t quickly “study up” on the merger and acquisition or investment market so as to materially close the knowledge gap on the fly unless you have been actively involved in the markets already.  The gap is often too large and the information too diffuse (or too expensive) to obtain quickly.  This is a great place to engage advisors, such as:

  1. Existing board members
  2. Informal business advisors
  3. Business peer groups, such as Vistage or Entrepreneurs’ Organization
  4. Business appraisers
  5. Attorneys
  6. Investment bankers
  7. Financial advisors

Deal advisors can provide critical, field-leveling information, such as market pricing and terms, the likely feasible tradeoffs between pricing and terms, and alternatives to the proposed transaction (a key source of leverage is having viable alternatives).  Good advisors will also help you establish your walk away point.  Even if you have to pay for that advice, those fees offer some of the highest returns on investment available.

 

 

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