Effective negotiations require a number of elements working together simultaneously with the right skills brought to bear at the right time. When negotiating the sale or purchase of an entrepreneurial business, certain guidelines can help ensure the greatest chances of a favorable outcome for all parties involved.
Know your facts and anticipate the other side’s point of view
There’s no such thing as being over-prepared; the best investment bankers rarely “wing it.” And, be flexible. You never know when you may have to change course. Be able to intelligently answer questions asked and have compelling arguments well thought out in advance to counter any possible objections.
Be a good “psychiatrist”
Understand the motivation of the people around the table and their expectations about what can be achieved. To get a counter party to agree to your proposal, you must make certain it is in their best interest to reach agreement with you. Understand what they need, as well as what they want. More important, respect all of them; playing hardball doesn’t usually work.
Know when to promote certain parts of the deal and when to offer key solutions. The solutions themselves usually aren’t that unique or unusual. It’s applying them to the right people or situation at the right time. And remember, negotiations, more often than not, have to evolve. Chances are, if you began a negotiation with the minimum of what you would accept at the end, the deal would probably be “DOA.” Good dealmakers understand timing, pace, and others’ motivation.
Keep your emotions in check
Don’t make the transaction a scorecard for your success. Most of the deals that fail don’t do so because of the numbers; they fail because parties don’t like each other or because someone gets too emotional about the price.
Many sellers say, “I will not sell if I don’t get X amount of money – that’s my bottom line.” But the market may not support that number. Even if it’s the right time to sell, this deal will fail because the sellers want a certain price – their egos get in the way. I ask sellers what they would pay for the company themselves. Usually, a seller wouldn’t buy a company himself for the asking price. Then, if they want $120 million but would only pay $100 million themselves, of course, the deal won’t work and, maybe, they will see the need to let the marketplace set the price.
Women dealing with men in negotiations often have an advantage because men may let their hair down more with women, whereas they often posture with other men. Also, contrary to conventional wisdom, women are less emotional than men about the necessity of making every deal. For most women, there’s no scorecard being kept of their successful deals during their entire careers, but rather the success of their relationships.
Know when to quit
I say this knowing my reputation for being persistent. But, one has to know when to stop. Sometimes a deal just can’t be made; the parties simply cannot come together, regardless of the effort. Understand the difference between persistence that is fruitful and yielding progress and that which is non-productive and simply going nowhere.
Short of calling it quits, you should always try different tactics and mix up the game against your opponent. In a tennis analogy, this equates to lobbing the ball versus rushing the net. Just because your first strategy didn’t work doesn’t mean you’re not a good player. The same is true with negotiations. There are many stages in deal making. Too often, negotiators just go in with one strategy and when it fails, they’re done. You may need to try a different strategy or tactic before you quit.
I am in the middle of a deal now that is a perfect fit, but both parties have dug in their heels and will not move. For example, the buyer offered X MM at closing and an earn-out of X MM more over three years, but the seller wanted X MM plus and and no earn-out. I told the seller why the buyer could not give him exactly the deal he wanted. I explained that the buyer is a public company and needs to show a ROE of 15 percent in the first year or, certainly, in the second.
I said that if the buyer were to pay the seller what he wants, the buyer would not achieve that ROE until the third year – its stock would suffer. I suggested that we discuss an earn-out based upon the base case, the expected cash flow that everyone agrees the company will generate during the next twelve to eighteen months. Everyone knows that the expected base case is solid, and that way the seller will get his price anyway, just a year later. So, the buyer came back with a small compromise and accepted an earn-out. The seller agreed. It looks as if the deal will close, but that will happen only because we went into the negotiations with all of the facts, understood both parties’ respective wants and needs and were open to change. We were able to convince all parties to adjust their strategy to succeed.
© 2006 Ewing Marion Kauffman Foundation. All rights reserved.
Jewelle W. Bickford Senior Managing Director and Global Partner Rothschild, Inc.