This is a whole series of articles on Mergers and Acquisitions, make sure to check all other articles including:
Part 1: What Are Mergers And Acquisitions
Part 2: Synergies In M&A Deals
Part 3: Outline Of Business Valuation Techniques
Part 4: Quick Overview Of M&A Process
Part 5: Selling Business To Private Equity
Part 6: Selling Business To Venture Capital
Part 7: Letter Of Intent (or “LOI”) In Mergers And Acquisitions
Part 8: Due Diligence Process
Part 9: Principles Of Negotiating In Mergers And Acquisitions
Part 10: Sale And Purchase Agreement
Part 11: M&A Deal Closing
A negotiation involves two or more parties, both of which have something that the other wants. In order to have that exchange, both parties need to come to an agreement and in the process of coming to this agreement, the bargaining process is what negotiation is all about.
The process of negotiation really can be broken down into three very simple steps. The first of these is preparation, so doing your homework before you start to enter a negotiation. Secondly, there’s the negotiation process itself and thirdly, there is the closing of the negotiation in order to make sure that you end up with the result that you are looking for. And by the way, it’s also important to make sure the other side does too. So that’s it a very simple introduction to understand what a negotiation is.
Let’s look at how we define success because this is absolutely critical in a good negotiation. You either arrive at a win-win or you don’t successfully close the conclusion of the negotiation, and you end up with a loose-loose. But what you should not be aiming to do is end up with a win-loose because if the other party goes away with their objectives unsatisfied, you will either find that this agreement breaks down or will have a very unsatisfactory relationship going forward.
In order to arrive at a win-win solution, you must be well-prepared. Let’s look at some of the core skills you will need in your negotiation.
Firstly, it is important that you clearly define a range of objectives. These are the things that you want to achieve from the negotiation. However, you must also have an open mind and be prepared to explore possibilities as you go through the negotiation. Ideas and proposals from the other side may come up which you have not considered, and you must make sure that you are open to seeing how these can help you to achieve your objectives.
Be prepared to be interactive. A good negotiation is one where there’s a free exchange, albeit under controlled conditions of information from both sides. If you just sit there very stone-faced, it is unlikely that you will develop a rapport and relationship with the other side with whom you are negotiating. And if you don’t do that, you’re unlikely to get to win-win.
Make sure you prioritize the items in your objectives very clearly. Understand what is really important to you and equally understand what you are prepared to compromise on providing you receive a compromise from the other side. Be positive, focus on the gains that you get in a situation, whether it is a counter-proposal from the other side or whether it is part of your own strategy for negotiating with them in order to achieve your objectives. The minute you start focusing on losses and take a very negative approach to negotiation, it is already the first step in which you are not likely to achieve success.
It’s important that you read the other party’s needs. If you can understand what is important to them, then you will help them achieve their objectives, and you will get to the win-win. If you are oblivious to their priorities and what is important to them, you do not know whether you are conceding something which is going to be important to you against something which is unimportant to them. So it is really important to read the other side’s requirements and needs.
You must be prepared to compromise, but again, do that in alignment with your own priorities. Getting to an agreement in a negotiation is not all about you holding your ground and them giving in to you. There has to be a two-way process. If you understand your objectives, you can then define your strategy on how you get there. If you know where you are going, you can actually work out your route map to how you will get to where you want to get. And if you are inexperienced in negotiation, do consider using agents. But if you do use agents, make sure you define their role very clearly and make sure they understand your objectives and your needs very specifically.
The major stages of a negotiation are preparation, proposal, debate, bargaining and close. The preparation is all the work you do before you start your discussion with the other side. And the initial part of that discussion is a proposal effectively made by both sides. So you establish the opening positions of both sides, and you will understand then how near or how far apart you are. This obviously leads to a debate about the relative positions merits and what you want to achieve and what they want to achieve. And that inevitably has as part of it a bargaining process at the end of which hopefully you close to a successful transaction in order to be successful. Then there are some core things you need to think about.
We have already spoken about win-win, but I do want to reiterate it. The purpose of this negotiation is to get to a position where you both satisfy your objectives. However, you should be aware that when you are negotiating with another party, there may be some cultural differences, which means that they may interpret what you say and do differently to the way you are actually intending it to be interpreted. This makes a particular difference when you are negotiating on across border transactions. So you need to be aware of the cultural differences between America and Europe and do not assume just because you are British and that when you are negotiating with an American and you both speak effectively the same language, that we necessarily have the same cultural approach. And when you move into the Middle East or Asia, these differences become even more pronounced in the negotiation process. You must remain flexible in order to make sure that you can adhere to these principles of exchange. So you must be ready to change your thinking and your position if new things arise. Be aware in any negotiation that there is a balance of power.
The object of the exercise is not necessarily to totally dominate the other side, but if you do lose control of the negotiation, you may find yourself being forced to concede points you do not want to concede. So you must bear this in mind the whole time and this may must influence the way you talk, behave, act, and respond to the other side in the negotiation
When you are negotiating with somebody and, and you are prepared to make compromises, do not be hasty, do not rush into anything. It’s very often important to hear the whole of the other side’s position about the things they want as opposed to conceding things on a point by point basis because you need to try to work out what is important to them in the round and therefore what you are prepared to concede to achieve your objectives in order to for them to achieve theirs. So do not rush into things and do not be sucked into to giving away point by point. Hear the whole of the other side’s position before you make any compromises or response.
And finally, make sure you have priorities established so that you can establish, you can be prepared to concede points which are less important to you in order to win the points which are really important to you
Let’s look at the negotiation objectives and in particular how you prioritize them. Firstly, let’s consider how you go about identifying your objectives. Firstly, think very carefully what it is you want to achieve in the negotiation. Now bear in mind you might have more than one objective and if that is the case, then it is important that you write them all down. Everything you can think of that may be a detailed point that you want to get out of the objectives, out of the negotiation. So you list out all these objectives, then try to prioritize them.
But you do need to apply priorities to them when you are thinking about this, understand the difference between wants and needs. Things that you want are the sort of nicest to have things, but things that you need are positions which are fundamental to your negotiating position and are absolutely critical to you.
So the needs are very important to understand clearly as is your ability to differentiate from your wants.
And then finally, think of the other side’s needs, priorities and objectives in their negotiation. So as you can understand or begin to understand what you think is important to them. Keep an open mind on this because when you start to talk to them, you may find that actually you have misjudged those priorities. But as part of your preparation for the negotiation, it is important to go through this exercise.
Let’s look a bit more closely at classifying your priorities. You need to think about this in a sort of three-step process.
Negotiation theory was initially established as a concept by Roger Fisher and William Ury in their 1979 book “Getting to Yes”. The principle, they argue, is that a rational argument can be set out to overcome an emotion driven mindset and that therefore every deal can be negotiated between rational human beings.
The system has four essential components.
The assumption was that both sides are behaving rationally and trying to maximize their outcomes from the negotiation. It was therefore logical that through a discussion and compromise, an accommodation could be reached somewhere in the middle ground with the negotiating skill of the parties determining who ultimately came out best.
Out of this rational approach came this acronym BATNA which stands for “best alternative to a negotiated agreement”.
This is essentially your walkaway position and every side should know what this is before entering the discussion. If you know what this is, then you can use it to leverage the discussions in your favour.
ZOPA, or the “zone of possible agreement”, considers a more optimistic approach and looks at areas of possible agreement between the parties. To be successful, you need to be aware of the interests and ambitions of your negotiating counterparty. If you can frame your proposals to meet his more important needs in the negotiation while minimizing the concessions on your key issues, then mutual agreement can be reached.
Essentially there are hard oblique, strong negotiators who take an adversarial approach and soft negotiators whose focus is more accommodating and compromising according to Fisher and Yuri. When hard negotiators meet soft negotiators, the hard negotiators come out on top, but often only at the cost of damage to the long-term relationship between the parties. In these cases, the soft negotiators conclude the transaction but leave with a sense of having lost the negotiation thinking fast and slow.
In the excellent book “Thinking, Fast and Slow” by Chicago psychologist Daniel Kahneman, the author argues against the rational and suggests that humans suffer from cognitive bias, which is both unconscious and irrational. We have, he argues two systems of thought system. One, our basic impulse is instinctive, emotional, and irrational. And system two, which is deliberate and logical.
System one guides system two, unfortunately. System one is automatic, not good at handling complex decisions, so it simplifies and is error-prone. We only use system two with consciously applied effort and therefore rarely. You should accept that there is an element of irrationality in your counterparty’s behaviour, and you should spend time observing and studying them to understand how they negotiate, and focus not on what the other party says but the intent and purpose behind his or her approach. As the negotiation progresses, try to understand how your counterparties react and counter your proposals and changes. Are they instinctive and irrational or considered and logical in their approach? Try to make sure that the context and manner in which you present proposals is more likely to be evaluated by them logically rather than bounced off by them.
When facing an emotional and reactive response, never say no when presented with something unreasonable. Always present a considered and evaluative response by saying you need time to think about their proposal and can you get back to them.
By doing this, you are signalling that you are more open and empathetic and this will help to develop trust between you. People want to feel that they are listened to and their views are respected. Ultimately, this will lead to a willingness on their side to be more rational and inclined to compromise during negotiation.
And remember that prior planning and preparation prevents poor performance in M&A negotiation. Before entering the negotiation process, carry out a SWOT (strengths, weaknesses, opportunities and threats) analysis on both sides. Seller and buyer conduct extensive valuation exercises on the target company. Whether you are buying or selling, use different methodologies to underpin your analysis and from this, develop a very clear idea of what the value drivers are in the business. What affects value most is what determines your opening bid and your walkaway price from the outset.
Only change the ladder if you are presented with significant new information or there is a material change in some aspect of the business. This also helps to prevent your approach being distorted by the psychological tactic of anchoring when the other side sets a price expectation early and all subsequent negotiations rotate around this figure rather than any rational discussion as the other side hijacks the price discussion.
Consider objectively the level of commitment of both sides to the deal. Does the seller need to sell? How badly does the buyer need to buy? If you understand how desperate either party to the deal is will enable you to understand where you can apply pressure in order to move the deal towards the outcome you seek to achieve.
Finally, know your enemy in-depth, have an understanding of their style, habits and approach which will arm you in advance and enabled you to consider and prepare counters to their expected moves against you.
This is like researching your opponent in a game of chess. If you can reach out to people who have negotiated with and against your counterparty in the past to see what you can learn, providing you can do this without breaching confidentiality or giving the game away.
In every transaction negotiation there are complex issues to be discussed and argued. When you are identifying your key alpha and beta issues, combine them with a brief assessment of the position of the two sides, yours and your counterparties. Then add to this your view on the position or some compromise or range of options which you may be prepared to table at the appropriate time. Create a table of these for all the issues which are important to you and work through them with your team. Work to achieve a process of reciprocity.
A proposal and compromise are met in return by some concession from the other side. In some cultures this can be difficult to establish, which is especially painful in cross border transactions. This has to be put in place early on in the process, and it is worth spending time arguing for this as part of the process.
It follows that once agreed, it is unacceptable to reopen the issue again to try to extract further concessions. If you can establish this give and take approach, it can add momentum to the deal.
Beware of negotiating issue by issue before you understand the whole of the picture from the other side. Get them to present their case in full and then go back and address issues with a full understanding of the counterparty’s position.
If you do not have a detailed timetable when going into negotiations then you are in trouble. A detailed timetable is not a calendar entry, it is a very detailed document which has got every single item that you need in your deal, every event, everything that you need to record and make sure everybody knows about it in the right order, in the right sequence, and it is in a document. And if you have not created one yet, now is your chance, just before you sit down and start negotiating. I cannot stress this too highly. Every deal must have a detailed timetable. This is normally run by the buyer’s advisors, and it has absolutely everything on it. Now, I absolutely guarantee you without a timetable your deal will not succeed.
You just simply will not be able to manage the process and hold it all together. It is as simple as that. Of course, every deal is unique, so I cannot create your timetable for you. The best way to think about putting a timetable together is to think about all the different advisors and all the different things they will be doing and then get them into the timetable. And if you are not sure about who does what, then go back to those advisors and ask them to put their own activities into a timetable, and then you can coordinate everything. Now the key columns are dates and days, events, comments, responsibility.
Now you can also add parties to make it clear which people are involved in which events. And a really important tip is, if your deal takes two or three months, to make sure you get everybody’s holidays noted in there because if people are away, it can become very disruptive, particularly if they are one of the principles in the deal-making. So stop what you are doing and make sure that your deal timetable is fully itemized and fully up to date.
It goes without saying that the timetable should be circulated to all parties, buyer and seller, and regularly updated. If there are any major changes, update it, recirculate it, and it is also worth saving the file and putting at the top a version number so that you can tell exactly which is the most up-to-date version, and so there is no ambiguity or risk that somebody is looking at an outdated timetable.
Let’s take a look now at the key learning points from the section on negotiation. In their book “Getting to Yes: Negotiating Agreement Without Giving In”, Fisher and Yuri have argued that negotiation is basically a logical and rational activity. Now this book is a fantastic primer as a starting point if you are learning negotiation. And it’s also of a useful tool to understand the basics of how to negotiate and what your negotiating position is going to be.
But as you will see, it is not the last word on the subject. From their analysis came the approach of having a “BATNA” (or the best alternative to a negotiated agreement) worked out. So it’s actually your plan B. And this is a very valuable concept to think through and should be part of your negotiation preparation. You should also have a clear idea of the “ZOPA” (or the zone of possible agreement), essentially the areas where you overlap with the other side and where you are prepared to compromise to meet some of their requirements and demands.
It is also important to know that in a head-to-head meeting between hard negotiators and soft negotiators, the hard negotiators normally come off best, even if it is at the cost to the long-term relationship with the other party. So this is something to think about when you are evaluating the other side’s style to the negotiation.
Now moving on with the thinking. In “Thinking Fast and Slow” Kahneman, a brilliant psychologist, argues that the mind works in a sort of two part system. The system one is emotional and sort of automatic and system two is logical and very straightforward, but requires a lot of effort. The problem is that system one is prone to error, and it dominates system two because it is the system one is the default system, and system two only kicks in if you really make the effort to think about something.
So when you are negotiating with another party, you and your counterparty are both likely to give an emotional reactive response rather than a considered rational one. And you have to think about that and how you really want to communicate the points you want to make to try to get the other side to consider them rather than just kicking into system one. This of course means that your preparation for your negotiation is even more important than ever. One of the things you can do is to conduct a SWOT (strengths, weaknesses, opportunities and threats) analysis on both sides, on the counterparty and on your own position and your own business. To make sure you thought it through, make sure that the valuation work you do on the target is thorough. And if you are selling your company, make sure you have your valuation work done thoroughly so that you can defend the valuation that you want the other side to pay.
Make sure whatever you do that you understand where the limit is, what is your walkaway position and if they push you, then you may well have to walk away from the deal rather than to do a bad deal. Make sure that you understand the commitment of both sides to the deal and then see if you can leverage this to your advantage.
If the other side is desperate to get a deal, then you will be able to push harder, but you need to have a sensitivity towards what will make them walk away and what will get them to the table and close the deal. But if you understand their commitment and what drives their commitment, what the issues behind are, that commitment makes them want to do the deal, and then you can start to use those issues to your advantage.
Study your opponents, understand how they behave, how they present things, the approach they take to the negotiation. And then you can react, and you can develop your own tactics to basically counter or to make the most of whatever approach that they take in a negotiation. And never ever say no, you may not like what they have put forward, but take it away to think about it, to consider it, and then come back with an alternative. If you are continually saying no to things, people will just get fed up and walk away. So you have to come up with creative ways to basically put your point back differently, but still maintain empathy and trust.
Make sure that you take control and manage the process. You need to be super organized and really on top of all the detail and making sure you are driving the process, that you are keeping to the timetable and the momentum, that you are really in command of the situation. Don’t simply sit back and let the other side take control. Reciprocity is a really important principle. It can be different, difficult to establish with some cultures, but if you can establish the idea that if you give something to the other party you can expect in return some reciprocity pattern, and this will be much easier to get everything negotiated.
If you don’t understand the whole of the position the other side wants to take, then it is more likely that you will get negotiated in detail and piecemealed up, and things will be peeled off you, and you will not get what you want. So at the beginning of a negotiation, it is always good to get the other side to put their whole position on the table, and then you can say: “right, okay, so now we can go back and deal with these points in some sort of logical order”. But don’t let them do a sort of line by line, negotiation until you understand the entirety of their position.
Manage the timetable carefully. There should be a date set for completion, and you should use this to keep the discussions moving forward. As has been said, time kills deals. Make sure that you integrate the due diligence process into the negotiations. This may involve having to reopen issues where there has been a material change, but this should be done concurrently during the negotiations and not saved up as a long list of changes as the deadline date for deal closing approaches. Make sure that any issues that come up from due diligence get fed in as quickly as possible and can therefore be brought into the negotiation as soon as they become an issue so that you do not end up with a large pile of open issues at the end, which then turns into a crisis and a real problem to closing the deal.
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