Let's Make A Deal! 5 Tactics For Becoming A Better Negotiator — Part II
15 May, 2020Many people think talented negotiators were born with innate skills. And although there is an element of truth to that, it’s also true that good negotiating skills can be learned. Negotiating skills can be improved through experience, which can be very expensive in an M&A context, through reading academic research on negotiation techniques and by learning best practices from negotiation experts.
For this 5-part series focused on improving negotiating skills, we interviewed 63 corporate executives to find out their perceptions of what skills make for a good negotiator and whether those perceptions match up with available research. Keep in mind that the conclusions we reached are what we consider best practices, not dogma. Every negotiation is unique, and the tactics outlined here will not apply to every business situation. But these best practices make for a good foundation.
PART II — WHO SHOULD MAKE THE FIRST OFFER?
Question: When the time comes to talk numbers, do you make the first offer?
- No—why limit what the buyer might come up with? — 27%
- Yes—but only if I’m asked to provide it — 32%
- Yes—and I’m going to do that proactively — 19%
- Yes—and in addition to that I’ll give my position on all the material terms — 22%
Most people believe that it’s best to wait for the other party to make the first offer, but according to academic research the correct answer is C: You should proactively make the first offer in a negotiation with a potential buyer. This recommendation is based on a concept called “anchoring.” Anchoring is a powerful negotiation tactic that establishes a reference point for negotiations such that subsequent positions are adjusted in respect to that anchor. Most negotiators don’t even recognize when an anchor is affecting them, but in most cases, it is.
Here’s an example:
Company A is seeking to acquire Company B. The CEO of Company B tells Company A that his company is “A billion-dollar company.” Company A knows that there is absolutely no way Company B is worth a billion dollars, but for a year and a half the CEO of Company B repeats the mantra: “My company is a billion-dollar company. We’re a billion-dollar company.”
Finally Company B tells Company A that they’ve been approached by another buyer, but as “a billion-dollar company,” they’re not happy with the other party’s offer. What does Company A want to do?
As it turned out, the CEO of Company A, who has expressed great interest in acquiring Company B, surprisingly tells his team that they’re going to pay a billion dollars for Company B because “that’s what they want.”
At the beginning of negotiations would Company A have ever come up with a valuation of a billion dollars? Of course not. It would have been something drastically lower. But the anchor that the selling CEO set dramatically affected Company A’s view of the value of the company, demonstrating that anchors can be extremely powerful.
Sometimes anchors are perceived to be way off base, and buyers will walk away. But more often than not they affect perceived value. If a company says it’s worth 100 million dollars, but a buyer, after looking at discounted cash flow and comparables, places the value at 60 million, that buyer may end up making an offer of 70 million. After all, it’s 30 million dollars less than the company says it’s worth. But this demonstrates that the buyer is reacting to the anchor, not their own perceived value of the company.
What about answer A? Is it ever better to let somebody else make the first offer? Why limit what they might come up with? In some cases, that can be a better path, particularly when the selling company might have a very wide valuation range. This is typical with hot Internet companies where revenue is small and profits may be nonexistent. The company might have a small team, but a huge level of adoption. In these instances, when value is hard to determine and the buying company’s plans and perceived value are unclear, it may be best to let the buyer make the first offer.