The art of corporate finance negotiation (Part 4)

This is the fourth blog in a series of 5 that our Partner and Head of Corporate Finance, Paul Mason, has written, based on his experience of negotiating deals successfully over many years.

Part 1 (Every conversation is part of the negotiation) can be found here.

Part 2 (Negotiate the ‘Heads’) can be found here.

Part 3 (Don’t sweep it under the carpet) can be found here.

Be consistent and … be consistent (Part 4)

Swapping the art analogy for another: negotiating during mergers and acquisitions (M&A) can be likened to a card game… it’s not just about what hand you have, it’s also about how you play it.  Critically, it’s not really about how valuable your hand is to you – it’s about how valuable it is to the other party.

When everything is amicable and friendly, negotiation is fun and you might even be tempted to think of it as a bit of a game.  However, there will be times when you’re convinced you’re right and you just can’t seem to make the other party understand.  The goal in these situations is two-fold: to seek to understand their entrenched position better; and to convey precisely why you hold your own view so firmly.

The key to negotiation in such situations is communication and consistency.  If something is important, you need to make sure the other side know it is important to you and therefore they need to treat it as important.  Moreover, if it’s really important, then you have to communicate that and make sure there isn’t any conflicting messaging.  We advised on a transaction recently in which we had to be careful to repeat precisely the same message to the buyer over and over again during a critical phase of the deal – which took nearly a week of carefully consistent messaging.  The risk of varying what we were saying was a lack of consistency in what we were asking for and therefore a legitimate questioning of whether it was as important as we were asserting.

Consistency also applies to the seller’s own objectives.  While these can change over the course of a transaction, if they do, it will likely be because they weren’t interrogated sufficiently at the start.  We always ask clients, “why do you want this?” and typically follow that with a further series of, “but why?” questions.  Eventually we find out the real answer.

If you are not consistent from one stage of negotiation to the next then how can the other party truly believe what you are saying?

That wraps up this fourth blog article which has focused again on tactics and approach during negotiation.  The final part will be more of a general recommendation on how to be satisfied – during and after – the deal with the result.

If you are looking to purchase or sell a business, contact Paul today on 0131 558 5800 or email paul.mason@chiene.co.uk.

Read part 5 – Be true to yourself

The art of corporate finance negotiation (Part 3)

This is the third blog in a series of 5 that our Partner and Head of Corporate Finance, Paul Mason, has written, based on his experience of negotiating deals successfully over many years.

Part 1 (Every conversation is part of the negotiation) can be found here.

Part 2 (Negotiate the ‘Heads’) can be found here.

Don’t sweep it under the carpet (Part 3)

A lengthy, onerous and – bluntly – painful part of a transaction, after agreeing ‘Heads’, will be some form of ‘due diligence’.  This is where the prospective buyer seeks to remedy the massive “knowledge gap” between themselves and the seller.  The seller is always going to know more about the business which they have built up and lived with than a prospective buyer.  Due diligence is the process by which questions are asked, answers are provided and clarified and the prospective buyer reaches a point whereby they can make an informed decision on whether to purchase, and on what terms.

The working assumption for any seller has to be that bad news will come out during due diligence.  Whether this is financial or operational underperformance, litigation risk, or something murky in the company’s history, any assumption that it can (or should) be hidden is a foolish one.

Bad news has one of three consequences:

1. It can cause a deal to collapse;

2. It can erode the buyer’s price (or weaken the structure) versus the previous agreed deal; or

3. It can be accepted without material impact.

When advising sellers, we always want to find a way to push any bad news into that third category, which requires careful management of timing and delivery.  Hiding it amongst good news might work occasionally for politicians, but it rarely works in M&A, especially if the buyer is suitably advised and experienced.

Reflecting on the last blog post about negotiating the Heads, it is often (but not always) best for sellers to bring out the headlines of any bad news story into the open before Heads.  Whilst this can risk reducing the headline price or deal structure, at least the sellers are agreeing to enter into the next stage knowing a more realistic and deliverable deal is on the table.  There isn’t the false comfort of an inflated price, which is invariably going to suffer significant erosion when the bad news emerges.  Secondly, establishing trust requires honesty and integrity: having bad news teased out can damage this important principle.

There can be a fear that tabling bad news early will turn off a potential buyer to the point where they walk away.  Conversely, waiting until they are emotionally “in” and heavily invested in a process will surely make them less likely to back out?  Unfortunately, emotion is rarely something we want to encourage in M&A if we want to get the right deal.  The tactic of leaving bad news until the 11th hour is a gamble that I very rarely condone.

In the penultimate, fourth part of this blog series I will look at how to act during a deal and advice for managing difficult and tense negotiations.

If you are looking to purchase or sell a business, contact Paul today on 0131 558 5800 or email paul.mason@chiene.co.uk.

Read part 4 – Be consistent and… be consistent