Negotiating an Acquisition: Nine Steps to Success

There are many types of negotiations, and all are unique. A skilled negotiator in one setting will not necessarily be expert in others. This generally is due to a lack of familiarity with the subtle complexities involved in that specific type of negotiation, which might be outside the scope of the negotiator's experience.

Consider the differences in the following four types of negotiations: an acquisition transaction, a union contract, an athlete's contract, and the determination of the selling price in a supply contract between a customer and vendor where the two have a continuing relationship.

You probably deduced that these four negotiations are as different as night and day. The differences include the prior relationship between the parties; the necessity for the continuity of a relationship after the completion of the negotiation; the degree of interdependence between the parties; and the replaceability of a party in the case of deadlocked negotiations. However the most significant difference is the variables and factors that the parties use to generate leverage over each other.

Acquisition negotiations are unique for several reasons, including:

  • It's one-time contest between the parties.
  • Generally, there is disproportional strength and power possessed by the parties, as the acquirer is usually much larger and has considerably more clout in the marketplace.
  • The acquirer is usually much more familiar with the acquisition process. Obviously, this makes it mandatory for a selling owner to find a way to level the playing field.
Negotiating an acquisition is an art, not a science. It is the art of exerting pressure on one's adversary through maximum utilization of all available leverage points. Negotiations are a test of wills and the ability of one person (company) to superimpose his/her will on another.

Following are nine critical points that can enable a selling owner to level the playing field and achieve success in negotiations.

  1. Do Not Avoid Confrontation
    Negotiations are confrontational by their very nature. It is absolutely essential that a selling owner recognize this and not attempt to avoid necessary confrontation. However, he or she should never be the one that instigates it.

    The successful negotiator conveys that his will is going to prevail without demeaning his adversary. He should be demanding and controlling but in a positive way.

    Unfortunately, confrontation is usually provoked because large acquirers demand more than they have a reasonable right to expect. However if you (as a seller) are knowledgeable about your situation, realistic in your expectations, and stand your ground, you should be able to sustain your position against a large acquirer. The acquirers usually will resent your strength but will respect you for defending your position.

  2. Know Your Goal
    You must stay focused on achieving the primary objective(s) of your negotiating strategy. Don't become obsessed with secondary issues. Many a negotiator has failed because they became obsessed with winning a specific battle. To achieve the ultimate success, you must remain single-minded in purpose to achieve your primary goal. Rarely is a war won in which one side wins all the battles--you want to win the war.
  3. Determine Transaction Price
    If you're selling your company, you must know the future potential that your company provides an acquirer and the future vulnerabilities of your business niche. You should be aware of all major issues impacting the acquisition. You must understand how the business foundation, the major issues, and your company's future translates to an aggressive, premium market price.

    You must be able to intelligently answer the acquirer's questions about your company and its future prospects. The ability to do this will portray your total command of the situation and establish credibility with the acquirer. This should enable you to obtain the control necessary to sustain the maximum acquisition price.

    Before entering negotiations, define a realistic but aggressive expected transaction price. Also determine an acceptable bottom line price. After these have been established, you can set an asking price.

    Prudent strategy provides for a reasonable level of movement between the asking price and expected transaction price, so that your ultimate objective can be obtained without demeaning the opposing negotiator by making him feel like he is being bludgeoned.

    Once your pricing expectations have been established, a deal should not be transacted until this price is obtained. If the deal does not evolve as quickly as you like, be patient. In certain situations, deals only happen when they are ready to happen, and acquirers only move when they are ready to move.

  4. Obtain and Maintain Control
    From the first meeting, both parties are trying to obtain control of and dominance over the negotiations. The establishment of control will accrue to the party that has mastered the complex psychological factors underlying the negotiation of an acquisition.

    The party that initially establishes control gets momentum. Once this occurs, the controlling party is generally able to obtain the majority of concessions, and usually the most important ones. In addition, once a party gets control, it is extremely difficult to reverse the roles.

  5. Utilizing the Leverage of Multiple Acquirers
    Do not provide an acquirer an exclusive look. Your objective is to obtain offers from all potential acquirers as close together as possible. The leverage from these competing, multiple offers could put you in the "driver's seat." It might precipitate a bidding contest that produces a price in excess of the expected transaction price.

    My firm recently represented a machine tool manufacturer. The offer of a major strategic player, which satisfied our expected transaction price, was selected from many competing offers. As we were in final negotiations on a letter of intent, one of the losing bidders re-instituted contact. I told them to make an offer within 24 hours that I couldn't refuse. Subsequently, they offered a price that was 15% in excess of the expected transaction price. Only the participation of multiple acquirers with acceptable offers enabled the realization of this transaction price.

  6. Control Acquirer Contacts
    No such contacts should be instituted until after a letter of intent has been signed. In fact, to the extent that you can reasonably limit the contact between the acquirer and these parties at any time, it will be helpful in minimizing the disruption to your company.

    However, if an acquirer feels these meetings are essential, you should attempt to be present at all meetings. Unless your presence in a particular meeting could reasonably be construed as an attempt to restrict the free flow of information, make it your business to be there.

    When an acquirer wants to meet these parties, ascertain what they are trying to learn. Then you should adequately prepare these parties for the meeting. This does not mean that you are trying to "stage manage" the meeting. Instead, it reflects your intention to preclude any parties not thoroughly familiar with all aspects of your operation from providing erroneous or misleading information.

  7. Know Your Adversary
    Obtain all the information you can about the acquirer, its results, and its outside advisors and key executives involved in the deal. Also attempt to determine the acquirer's deal motives and strategic needs that can be satisfied by the acquisition.

    An assessment should be made of the personalities of all participants on the acquirer's negotiating team. You should try to determine the motivating factors of these participants-both their personal and group goals.

    Unfortunately, the participants often have different personal objectives than the acquirer's group goal. If you are unaware of the participants' self-interests, their actions might surprise you and possibly derail a deal.

    Therefore, the definition of the participants' personal goals is of critical importance to a selling owner. Then you can develop a negotiating strategy that enables you to defuse the impact of personal goals that conflict with group goals, and thereby substantially increase your likelihood of success.

  8. Just the Facts Are Necessary
    Do not allow your ego to get out of control. Stick to the basic facts about your company that are of interest to the acquirer. Do not unnecessarily stress your personal accomplishments and interests or discuss your specific plans after the deal.

    It is a mistake to exaggerate or emphasize your importance to the company. Remember, even if you are going to work with the acquirer for a period of time, the acquirer is most concerned about how profitable the company will be after you leave. Consequently, stick to the specific attributes of your company, its products, its market position, and any other relevant information that the acquirer wants to know.

    Many novices unnecessarily derail deals by the disclosure of a seemingly insignificant fact.

  9. Don't Play Games
    A direct and straightforward negotiating approach is most likely to result in the successful consummation of a deal. It will facilitate the development of trust and respect among the parties.

    In fact, this candid way of approaching a deal exudes the strength that you want to convey. Game-playing during negotiations does not generally produce successful results. It tends to be counterproductive. Games are self-perpetuating and usually expand to permeate all aspects of negotiations. They further complicate an already complex situation.

To sum up, in these times when business is increasingly being conducted on a global basis, it is likely that the acquirer will be a large national or multinational company.

The adherence to the above nine key negotiating points will level the playing field for a selling middle market owner. His or her familiarity with the intricacies of the negotiating process and the ability to execute expertly these points will determine the likelihood of achieving success.

George Spilka is president of a Pittsburgh, PA-based mergers and acquisitions consulting firm that specializes in middle market, closely held corporations. He can be reached at George Spilka and Associates, ph: 412/486-8189.

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