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No matter how well an M&A transaction seems to be progressing, it can meet a swift demise in negotiations. Deal negotiations may be most important – and if underemphasized, most challenging – stage of a transaction. If both buyer and seller aren’t committed to serious, dispassionate and productive discussions, a minor disagreement can jeopardize the parties’ work leading up to that point.
Deal negotiations can be particularly difficult for first-time sellers. If you’re selling your business, you must prepare for possible challenges (not just on purchase price) and be willing to compromise throughout the process. Accordingly, you should formulate, determine and prioritize the ”must-haves” before you sit down to negotiate deal terms with the help of your M&A advisors.
If it took you years to build your business and you consider your employees part of your family, there is a lot at stake when it comes time to address the succession question. Should you decide to sell your business, initiating the search and approaching viable buyers to enter into discussions or negotiations becomes equally a rational and emotional process. But if you do your homework and get to know your buyer, it may facilitate negotiating deal terms— and eventually closing the transaction.
Although due diligence is generally considered a buyer’s responsibility, sellers concerned about the future of their company and its people also need to conduct substantive research. Ensuring your prospective buyer, whether a financial (i.e., private equity) or strategic investor, has a good reputation, is successful in managing their own business and has not been convicted of fraud-related or other crimes may prove helpful for the process Further, you may want to investigate whether the buyer has made previous acquisitions, how successfully they were integrated and whether they flourished post-merger.
Most important, however, is to ensure that your prospective buyer is capable of financing the acquisition. If the buyer doesn’t have adequate cash, or access to credit facilities to finance the transaction in its entirety, other alternatives may be negotiated. Some buyers ask sellers to help with financing by accepting a portion of the purchase price out of future cash flows. If that’s the case with your M&A deal, thoroughly research your buyer’s ability to grow a business.
Establishing a negotiation “calendar,” a viable and realistic transaction timeline, can also help both you and the buyer to focus — and avoid conflict when talks begin. List the critical topics of discussion and assign viable times or dates that will keep your meetings – and hence the transaction – on course. Also draw up ground rules. For example, to circumvent impasses, you and the buyer may want to agree to temporarily set aside contentious issues to work on more productive ones.
When you finally enter into negotiations, keep some time-honored negotiation strategies in mind:
Don’t concede anything for nothing. You’re not going to win every battle, nor should you expect to. But be sure that any concessions you make mean something and that you receive concessions of equal value from your buyer. If you accept a lower price than originally discussed, for example, you might ask for payment in cash.
Always move strategically. Every round of negotiations should move your interests forward in some way. For example, the Harvard Business School has found that when sellers propose a high opening price — even one that’s unrealistic — buyers tend to counter with higher initial offers than they would otherwise.
Know when to fold. If negotiations drag on for weeks and don’t seem to be getting anywhere, don’t feel that you must complete the M&A deal simply because you’ve already exerted time and energy on it. Establish an absolute price floor (or other “must have” concessions) and, if the buyer won’t accept it, be ready to walk away.
M&A deal negotiations can be intense situations in which expectations, seller’s emotions and buyer’s ambitions may easily collide. So you need to expect some turbulence and anticipate challenges. Your M&A advisors can be particularly helpful at this stage of a transaction because they have extensive experience to negotiate deal terms, manage expectations and “inject” objectiveness, if necessary, through the process.
Contact our M&A advisors in Michigan, Houston or Ft. Lauderdale to help guide you through selling your business, from start to finish.
This publication is distributed for informational purposes only, with the understanding that Doeren Mayhew is not rendering legal, accounting, or other professional opinions on specific facts for matters, and, accordingly, assumes no liability whatsoever in connection with its use. Should the reader have any questions regarding any of the news articles, it is recommended that a Doeren Mayhew representative be contacted.
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