A Guide to M&A Negotiating Tactics

How vital are negotiating skills during the sale process?

Surprisingly, high-level negotiating skills aren’t the make-or-break factor you might imagine. This is good news for those of us who aren’t negotiation legends like Henry Kissinger, the former U.S. Secretary of State renowned as one of history’s greatest negotiators.

However, there’s a catch. If negotiating isn’t your strong suit, you must compensate through thorough preparation and strategic positioning.

That entails proactively addressing and resolving any potential issues before the buyer even raises them. It involves projecting confidence rather than desperation. It means exploring multiple potential buyers. It’s about maintaining emotional detachment.

The upcoming article delves into these aspects and more:

• Steps to enhance your negotiating stance before discussions commence.
• Identifying when most deals falter and how to safeguard your transaction.
• Why exceptional negotiating skills are overhyped.
• The real key to successful negotiation (hint: it’s not about haggling).
• Strategies for staying composed during negotiations.
• Why focusing on running your business is often more productive than endless negotiation.
• Unveiling the top tactic savvy buyers employ to drive prices down and how to counter it.
• Techniques to incentivize the buyer to expedite the due diligence process.

Since preparation is paramount, let’s begin the groundwork…

Conduct Pre-Sale Due Diligence to Maintain Negotiating Posture

Ideally, your aim should be to anticipate and resolve any potential issues before they come to the buyer’s attention. To achieve this, step into the buyer’s shoes and assess your business as early in the sales process as possible through thorough due diligence.

While the best time for this assessment is just before listing your business for sale, it’s never too late to start. Even if your business is already on the market, conducting pre-sale due diligence should become a priority. Ensure your financial records are reviewed and organized, and also perform legal and operational due diligence on your business.

Many business sales encounter hurdles during the due diligence phase when undisclosed issues surface. If the buyer uncovers problems that you haven’t revealed, they can gain significant leverage, potentially leading to negotiations for a lower purchase price.

Let’s be clear – every problem the buyer finds during due diligence becomes a bargaining chip, and in some cases, it could even jeopardize the entire deal. Your objective is not only to sell your business and move forward with the next chapter of your life but also to secure the highest possible sale price. By conducting pre-sale due diligence, you can maintain your negotiating strength throughout the entire sales process.

The Importance of Negotiating Position

Negotiating skills often receive more credit than they deserve. In reality, the art of negotiation requires less expertise when you’ve mastered the art of positioning. Yet, positioning is a factor that is frequently overlooked or underestimated.

The key to successful negotiation lies in your positioning. Think about buying a new car – is it easier to negotiate when you desperately need a vehicle, or when you can walk away without a care in the world whether you drive off with a car or not?

The secret to effective positioning is the desire to sell without the necessity to sell. Desperation should be avoided at all costs.

• The more options you have, the stronger your position becomes.
• Likewise, the more potential buyers express interest in your business, the stronger your position becomes. It’s essential to engage with as many prospective buyers as possible.
• Interestingly, when your business is performing exceptionally well, you might find yourself less inclined to sell.
• Don’t become emotionally attached to the idea of selling your business.

Creating a multitude of options is your path to securing the ideal negotiating position. Once you’ve done so, you must subtly convey to the buyer that you negotiate from a position of strength. Interact with buyers professionally, displaying interest but maintaining a somewhat dispassionate demeanor. Let them know you are prepared and motivated but not reliant on the outcome of the sale. Communicate your passion for what you do while making it clear that moving on is in your best interest. Ultimately, your message to the buyer should convey motivation without a hint of desperation.

Maintain Emotional Objectivity

Maintain a calm and composed demeanor throughout the entire process. Buyers may become uneasy if you lose your composure. In moments of escalating tension (and they will occur), consider defusing the situation and suggesting a continuation at a later date. Otherwise, make a concerted effort to uphold emotional objectivity throughout the proceedings.

Here are some effective strategies for preserving emotional balance:

• Utilize a third party, such as an intermediary or broker, to act as a buffer between you and the buyer.
• Avoid becoming overly dependent on the outcome. Refrain from allocating the proceeds before you’ve received them, and don’t make grandiose plans until the closing is complete. Keep in mind that 50% of accepted offers do not culminate in a deal. Approach negotiations with the assumption that the deal may not proceed.
• Maintain your focus and interest in the business itself—strive to either sustain or boost your revenues. This approach not only enhances the value of your business but also positions you strongly in negotiations.

While some negotiators may suggest employing tactics or tricks during negotiations, these can carry risks. The most favorable scenario is always an authentic position, rather than one that is manufactured or contrived.

Focus on Running Your Business

The primary error sellers often commit when accepting an offer is letting excitement overwhelm them, causing them to lose sight of their business. It’s essential to recognize that more than half of the transactions aimed at selling a business never reach the closing stage, even after an offer has been accepted. If your goal is a successful closing, maintain your focus on running your business consistently throughout the due diligence process and up to the closing.

Should your revenues experience a decline during this period, be prepared for the buyer to initiate negotiations for a lower price. Conversely, if your revenues surge, you can anticipate solidifying your negotiating position.

Keep Your Business on the Market

Keep your business actively listed until the ink is dry on the closing documents and the funds are securely in your account. It’s important to note that in mid-market deals, where seasoned buyers like companies and private equity groups are involved, exclusivity is typically required once you accept a letter of intent (LOI). In such cases, it’s advisable to negotiate the shortest exclusivity period possible.

However, for smaller businesses, it’s wise to keep your business on the market until the day following the closing. This approach helps you maintain a strong negotiating position. Furthermore, it’s beneficial to continue discussions with other potential buyers throughout the process, ensuring you have a contingency plan in place.

Avoid Deal Fatigue

Prevent deal fatigue by building alternatives and maintaining your emotional composure. Savvy buyers are well aware of the natural wear and tear business owners experience during a prolonged process. They may exploit this by prolonging negotiations and making last-minute requests. The most effective way to counter this is through strategic positioning. Always keep other options on the table, ready to go in case the buyer attempts to reopen negotiations.

The ultimate strategy for dodging deal fatigue is preparation. By thoroughly preparing your business for sale, you minimize the likelihood of the buyer discovering a material issue that could be used against you during due diligence.

The Importance of Honesty and Humility

Honesty

Any buyer who detects dishonesty will either become wary or intensify their scrutiny during due diligence. They may also insist on holdbacks or additional protections. Honesty can yield substantial rewards when selling your business. If the buyer perceives you as honest, they will view your business as less risky, leading to smoother negotiations.

Humility

Humility is another valuable trait in a transaction. Price often correlates inversely with risk – lower risk tends to fetch a higher price. Who would you trust more: a pompous, arrogant individual or a humble one? Demonstrating humility throughout the process can deter the buyer from conducting exhaustive due diligence.

The most effective way to exhibit humility is when conveying the prospects of your business to the buyer. Always aim to maintain humility and conservatism when sharing subjective information.

The Importance of Communication Skills

Numerous obstacles in negotiations can be sidestepped by employing fundamental communication skills like active listening and articulating your ideas clearly.

We highly recommend reading “Getting to Yes: Negotiating Agreement Without Giving In” by Roger Fisher and William Ury.

Here are some valuable pointers for ensuring effective communication:

• Give the buyer ample time to express their viewpoint before formulating your response.
• When the buyer appears to be steadfast on an issue, take the time to uncover the underlying concerns.