M&A Negotiations: You Might Not Be as Good as You Think

27 January, 2016

Negotiate. We all do it. Its certainly necessary in the context of a merger or acquisition, but it’s also a common part of everyday life. We negotiate with our kids (who tend to be wonderful negotiators), with our spouses, with our neighbors, and with our colleagues, bosses and employees. Every day we employ negotiating skills in some way. And most of us believe that we’re pretty good negotiators. But are we? Are we as good as we could be?

Negotiations_montage.jpgMany people believe good negotiating skills are innate—something you’re born with. And although there is an element of truth to that, it’s also true that good negotiating skills can be learned and improved upon. Negotiating skills can be honed through experience, which can be very expensive in an M&A context, or by studying the academic research on negotiation techniques and learning best practices from negotiation experts.

Consider the following scenario: a potential buyer contacts the CEO of a startup. Negotiations are about to begin, and the CEO poses the question, “How much do I prepare?”

In a recent poll of 63 corporate executives we posed that question and got the following results:

  • I like to wing it—0%
  • I’ll research their business on the web and through some contacts—20%
  • I’ll do the above plus I’ll question my counterpart—5%
  • I’ll do all of the above plus I’ll evaluate my issues and preferences—24%
  • I’ll do all of the above plus I’ll discuss with my colleagues who know the counterpart well—51%

Option E was the clear winner, implying that most people believe that more information is always better. However, going the extra length of asking people in your company about the counterpart could very well jeopardize the confidentiality of the potential transaction, which can be detrimental to your company’s health. If a broad band of employees know that you’re in negotiations, it can damage morale and affect job performance, as well as have a destabilizing effect on the early parts of a negotiation.

From a research perspective, the correct answer is D: fully prepare for negotiations, but not at the expense of compromising deal confidentiality. How do you do that? It’s not enough to assume that the buyer will simply take your product, fit it into their channel and recognize revenue synergies; that’s not sufficient detail. The questions you need to answer include:

  • Why are you valuable to the buyer?
  • What’s attractive about you?
  • What do they plan to do with you?
  • What’s their high-level integration plan?
  • How are they going to integrate your people into their organization?
  • What will your role be?

By knowing as much as you can about their plans and intentions you’ll be better able to anticipate their motives and discern what’s important to them, thus enabling you to more optimally position yourself for negotiations.

Of course, the primary focus of negotiations will be on valuation. Before negotiations begin, put focused thought into how valuable your company is to a potential buyer. Determine your aspiration pricethe best price that is within reason. Then ask yourself, what the minimum price is that you would be willing to take before seeking another alternative (raising a venture round, waiting a year or two and growing the business, etc.). What is your BATNA (Best Alternative to a Negotiated Agreement)? What are your “Must haves” and what issues can you bend on?

Now, do the same estimation for the buyer. How will they perceive valuation? What have they done in the past? In this scenario, what is their BATNA? Once you understand the buyer’s motives and aspirations, look for an overlap with yours. That’s the zone of potential agreement, and that’s where a deal can be struck.

Rigorously looking at both what you want and what the other side wants is critical preparation for negotiations. In general, if the negotiation will last an hour, you should spend eight to ten hours preparing for it.

To learn more about becoming a better negotiator, download our free white paper, "M&A Negotiations: Are You as Good as You Could Be?" by Brian Moriarty:

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