Why is the Negotiation Stage Important?
Negotiating is part of daily life. It happens amongst our families and friends, at local markets or in professional transactions. In the world of business, negotiating is just as common. Due to the complicated nature of business transactions, commercial and corporate negotiations require far more meticulous research, and legal and financial support. It takes years of practice to perfect, as well as a strategic and target-orientated approach.
A seller will always want the highest value for their company, and a buyer will want the lowest price with the least number of risks and liabilities. Although this is a professional transaction, it also requires concessions, flexibility, and integrity.
The bargaining journey requires a give and take approach, and the end goal should benefit both parties. The negotiation stage is your final hurdle. Your preparation, strategies, and understanding of agreements will determine the outcome, and your execution will have an influence on the outcome. Negotiating is truly an art, and there is an abundance of how-to advice out there.
Every selling or buying experience is different. Each will have its own circumstances, methods, and specificities, so each negotiation process will be unique. If you feel you may need to retrace some steps, look at our guide on selling a business or our guide on valuing a business. To assist you in the negotiating process, this guide will offer helpful advice, strategies, and examples for sellers and buyers.
Considerations for the Seller
Before the negotiations can begin, you’ll need to come to the table with a realistic asking price. This price should pragmatic, and based on an equitable valuation of your assets, industry conditions, buildings or land you may own, your shares and other variables.
Likewise, having a reliable advisory team by your side is highly recommended. This advisory team should be experienced in negotiating your type of business and should be familiar with negotiation strategies. Nonetheless, here are some points to consider:
You can never be too prepared
A business owner looking to sell will likely be familiar with every corner of their business. But to ensure a successful deal, you’ll need to take your preparation and research to a new level. You’ll need to conduct preliminary research on your buyers, including their goals, requests, and preferred outcomes.
Think about potential questions they may ask you, and how you’ll answer these in a way that is convincing and reflects positively on your business. Do they have the necessary ethics, values, and finances to support your business post-sale? Buyers who demonstrate an interest in your company will have specific goals, so ensure you are familiar with these.
While you will need to prepare for every stage of the transaction, it is important to prepare for your first face-to-face meeting. Setting out a clear agenda will show the buyer that you are serious about the deal, and that you would like to conclude it in an amicable manner. In this agenda, you’ll need to include answers to questions the buyer may ask, questions you will ask them, where you will meet, your intentions and objectives, ways you will manage them, and a clear timeline of the deal.
Maintain a transparent arrangement
There is a human side to business transactions, and this will bring multiple dynamics to the table. While maximizing your return on the business is important, you will not achieve this if the partnership becomes unappealing. Miscommunication and frustration are common during negotiations, so take steps to mitigate any conflict.
Value is placed on communicating truthfully, even if that communication is something the buyer may not like. Remember that trust will not necessarily establish itself in relationships, but rather the contracts and signatures.
How you deal with people will depend on a specific country and their cross-cultural environment. Regardless of this, you should never be aggressive and confrontational in your approach. Both parties want to get a rewarding outcome and will have bargaining strategies in place to do so. This may include tactics that can potentially annoy or frustrate counterparts, but they should never offend or insult someone. The negotiations will either be agenda-bound, flexible or a synergy of both. It will be your responsibility to decide which one it will be.
When it comes to compromise, you’ll need to find a balance. Sometimes, buyers will put forward unrealistic terms or valuations. If you have conducted a realistic, honest valuation and the buyer is not willing to negotiate, you’ll need to make a decision. Will you continue compromising to accelerate the sale, or will you be assertive and stick to your initial offer?
Due diligence considerations
Due diligence can be an overwhelming phase for a seller. However, if you have prepared for it, and you have organized your documentation and have it ready on request, this process can move forward relatively quickly.
Due diligence gives the buyer and their advisors an opportunity to identify any risks or opportunities of your company. They will investigate every detail of your business, including financial, legal, and regulatory record, your assets, your market condition, the reasons you are selling your business, and other variables. They may also meet with stakeholders, your client base, and employees.
Find a compatible deal structure
The deal structure is not only about receiving a fair and accurate price for your business. There will be post-sale arrangements, covenants and financing considerations that will form part of this structure.
Likewise, how will the deal look? Will you be exiting the business through liquidation? Will you be selling its assets or shares, or will you want to stay with the company but relinquish your full ownership? Finding a deal structure that works for both the seller and buyer will take some time to finalize, so it’s imperative to be clear about your objectives and clarify small details.
It is not unusual for negotiations to collapse or fail. Even if you are confident that it won’t, always prepare a best alternative to a negotiated agreement (BATNA). From the initial proposed agreement, find the most realistic, alternative option and compare them. If you are confident to use your BATNA, but the buyer is still not willing to compromise, it may be a sign to walk away from the negotiations. At the end of the day, you don’t want to regret selling your business.
Considerations For the Buyer
As with any business transaction, the seller and buyer’s process of arrangement will look different. Unless you are a financial or strategic buyer, this may be a one-time purchase. Your first consideration should be hiring an intermediary that specializes in acquiring businesses like the one you are interested in. Purchasing a commercial entity – no matter its size – will always be a risk, so you need to ensure that your advisory team is reliable and experienced.
With that being said, you should not ‘kick your feet up’ whilst your team does all the work. As the individual buying the business, you should take initiative to gain a comprehensive insight into every phase of the purchasing journey, especially the negotiating stage. It will demonstrate to the seller that you are serious about concluding the transaction, paving way for an equitable negotiation.
Of course, the way your negotiation is structured will be based on the industry your target business operates in, the seller’s motives, and what units of the company you want to acquire.
Research and preparation are crucial
Preparing to buy and negotiate a business may seem obvious, but you need to have a clear plan of how you will conduct this preparation and research. A buyer needs to broaden their knowledge around multiple things: market conditions, the risks and benefits of acquiring a business, generating a pragmatic valuation, and investigating the details of the target company.
Economic conditions are different for each country, so it is vital that you update yourself on this knowledge, especially if you are negotiating a business in a different geographical location.
Once you have conducted research, formulate your lowest and best offer, and allow room to bargain the price. A buyer also needs to consider deal terms that will be unique to each transaction.
Maintain a mutually beneficial relationship
Negotiations can become messy if both sides aren’t willing to communicate truthfully and directly. Everyone wants a win-win negotiation, but that is not always possible. You will need to compromise, and you will need to stand firm against your decisions. This balancing act will be a challenge.
It can be helpful to understand the seller’s perspective, including why they are selling, how much time and energy they have invested into the business, and what their objectives and goals are. However, sellers can be overly optimistic about the value of their business, or they may want to rush the negotiations, so it’s important to manage expectations.
While respect and understanding are crucial, a seller should also acknowledge that a buyer is likely to assume more risk in the acquisition, so this relationship should be based on mutual respect.
Due diligence: your chance to identify risks and opportunities
Due diligence is an integral step for a buyer and their advisors, as it presents an opportunity to uncover all the risks and opportunities associated with the target. Your advisory team will investigate the legal, financial, and commercial elements of the business to gain a deeper understanding of the target’s value proposition. Likewise, this process allows the buyer to recognize what obligations they will assume once that take ownership of the business.
These are some elements that a buyer should investigate during due diligence:
- Financial metrics: financial statements and performance, realistic financial projections, the necessity of working capital, debt
- Intellectual property: patents, protection software, trademarks, possible technology infringements, litigations concerned with intellectual property, licenses, IT systems
- Customers or client base: customer-revenue ratio, customer risks, customer satisfaction, policies
- Fit: this will be specific to your transaction. You will need to evaluate how well both you and the seller fit, and consider products, services, integration, synergies, or revenue enhancements/downfalls
- Contracts: financial agreements, client or supplier agreements, equipment leases, employment contracts, exclusivity agreements, license contracts
- Other areas to investigate: employee and management, possible litigation issues, data privacy considerations, tax.
Agreements and Documents
To ensure that the negotiation (and entire sale process) is structured, you will need to develop agreements and contracts that detail the deal structure from a financial, legal, and commercial standpoint. These agreements and documents will be defined by the unique situation of your acquisition. First and foremost, the first document you will sign will be a contract between you and your advisors.
The target business will incorporate sensitive information that should be kept confidential. A confidentiality agreement protects this information private and protected. This agreement will be legally-binding.
This will be the document that is sent to potential buyers once the confidentiality agreement is signed. It is the seller’s responsibility, and it will essentially provide a granular insight of the target business, detailing its sector, age, financial insights, location details, the structure of the sale and other variables.
Heads of Terms
As the heading suggest, this document will outline the main terms of the deal. It is usually subject to contract (apart from confidentiality agreements), as the terms can change throughout the negotiations. It will often include payments structures, indemnities, earn-outs (if applicable) and agreements for the completion of the sale.
There will be hundreds of documents to scrutinize and sign, so it is imperative that both parties have a reliable advisory team to guide them throughout the deal. Other documents needed to complete the sale will include:
- The sale and indemnity agreements
- Transition agreements
- Warranties and covenants
- Seller and buyer protection
Negotiation Strategies You Can Implement
There are multiple strategies for negotiating a business. Depending on your experience and circumstance, you and your team will assess which tactics will work in your favor. Nonetheless, here are some general strategies you can use:
Listen and communicate
Negotiating is done by business professionals, but they are human after all. You cannot exclude emotions from business transactions, but you can manage them. It is crucial to listen and communicate with the opposite party to understand their perspective, issues, strengths, and limitations. By doing this, you can formulate a reasonable response.
Preparation is a broad term because being prepared requires an infinite to-do list, and if you don’t have one, there is a high chance of becoming overwhelmed. Part of your preparation will include investigating the business’s background, press releases, websites, and reviews. You will have to familiarize yourself with the buyer or seller. You’ll need to do some comparative research, diving into similar deals and market conditions, and you will need to discuss the deal terms of pricing with your advisors.
Be conscious of the dynamics
Who wants the deal to conclude more? The buyer or the seller? Consider your time constraints, alternative agreements, and who might have the most leverage and different stages of the deal.
Allow compromise, but know when to walk away
Negotiations don’t always work out. There will be a lot of back-and-forth discussion, and both sides will want to keep their best cards close to their chests. Before you even enter negotiations, you will need your highest price, a counteroffer, and a price that will cause you to walk away from the deal. Sometimes, you might find that an ultimatum that you are not happy with is thrown onto the table. This will be a sign to walk away.
An Example to Illustrate the Negotiation Process
Although every transaction will have particular processes, agreements and strategies, here is a brief example of what a manufacturing business deal would look like:
- A manufacturing company will have a significant amount of assets, so conducting a valuation is crucial for both the seller and buyer
- The seller’s intermediary will auction the business, and create a list of potential buyers that fit the seller’s criteria
- The seller will make initial contact with the buyer, either in an unsolicited or solicited manner
- Once both parties demonstrate an interest, the deal will commence
- The buyer will want to visit the manufacturing location, and will have questions that the seller should be prepared to answer
- A LOI (letter of intent) will be submitted, and due diligence will begin
- Purchase and Sale Agreement (PSA) will be drafted and signed
- Closing deals and transition
It’s clear that negotiating a business is not a straightforward process. It is a challenge that you will only overcome through granular research, industry knowledge and preparation. It can be an exhausting process, but a meticulous approach will guarantee a successful outcome for both parties. Be smart with your tactics but be respectful and calm in your approach. Seeking support and advise from entities that specialize in industry-specific acquisitions is highly recommended, considering the legal and financial nature of buying or selling a business.
Bargaining is a skill that needs to be mastered. Sometimes things won’t go as planned – you might bump into unforeseen problems, deal fatigue, and frustration. While this is common, you can take steps to try mitigate unwanted outcomes. For further support and advice, contact our team.
Now, go and achieve your goals!