Buying or selling a business can be emotionally exhausting, as well as mentally challenging. Nowhere is this fact more apparent than with the negotiations concerning the purchase price. Sellers often find it difficult to value a business into which they’ve poured their blood, sweat, and tears. Buyers, on the other hand, are skeptical of anything that cannot be measured objectively. Consequently, dealmakers use a team of professionals to advise them. As the lawyer on such a team, I would not presume to try to tell my client how to determine the purchase price. That’s not my job. I can, however, offer some suggestions on how to negotiate the purchase price.
This article is the second of a three-part series on the negotiation process. The first article concerned the differing perspectives of the negotiating parties and how those differing perspectives affect the process. This article addresses the purchase price--not the financial techniques of determining the price, but rather the process of negotiating the purchase price. The final article will examine important deal terms other than price.
Some of the suggestions in this article may appear contradictory. In fact, they are not. They appear contradictory because they are competing concerns that must be balanced, based on the judgment of the negotiator and the needs of the parties.
DEAL MAKERS AND DEAL BREAKERS
Transactional lawyers often describe each other as either “deal makers” or “deal breakers.” Unfortunately, many are in the latter category. The problem stems from the way lawyers are educated and, in some instances, the client’s expectations. Lawyers are schooled in the adversarial process of the courtroom, and clients often ask for the “meanest, toughest lawyer you’ve got.”
When a person is negotiating price, however, neither party is committed to the transaction. Consequently, what may be perceived as a tough negotiating posture may simply cause the other side to walk away. Negotiating the purchase price is not the same as settlement negotiations in litigation, where each side is willing to negotiate and compromise to remove uncertainty about the ultimate outcome of a lawsuit. Nor is it the same as labor negotiations, where each side will ultimately have to work with each other. In an M&A transaction, there is usually another potential buyer with which Seller can deal, or another target for Buyer to pursue.
TRYING TO WIN BIG IS NOT A GOOD STRATEGY
Strange as it may sound, trying to win big is not a good strategy. Consider the following scenario: Buyer offers to pay $7 million and Seller counters that the price is $15 million. Buyer says that $7.5 million is the best he can do, and Seller says, “OK, it’s a deal.” What happens next? Buyer gets very concerned and wonders what Seller knows that he doesn’t know. Remember, the negotiations concerning price are early in the process. The due diligence phase will follow, and it could become unnecessarily detailed and protracted if Buyer thinks Seller has something to hide. Seller would have been better off to have said $9 million and compromised on $7.5 million. Buyers will be happier, and less suspicious, if the price is determined after some hard-fought negotiations over numbers that are fairly close.
KEEP YOUR CARDS TO CLOSE TO YOUR VEST
The old poker adage is appropriate for price negotiations as well. It is foolish to lead with your best offer as Buyer or to state your bottom price as Seller. Regardless of whether the statement is sincere, the other side will not believe it. Moreover, the other side wants the psychological satisfaction of seeing some movement in the position of its opponent. Thus, there needs to be some back and forth on the issue of price. Those who want to “tell it like it is” and “avoid playing games” should remember that the parties to an M&A transaction are striving for a collaborative result in a competitive environment. It is usually impractical to spend the time necessary to change the negotiating climate by building the degree of trust between the parties that would be necessary in order to avoid these “games.”
EXPLAIN YOURSELF AND STICK TO IT
Your position should always be based on a carefully considered rationale, which you should explain to the other side. The rationale gives your position weight and makes it more persuasive than numbers that appear to be plucked from thin air. Accordingly, once you explain your position, stand by it for a respectable period, or you will lose credibility. Nevertheless, don’t say too much, because information is power, and it can be used against you. Old horse traders never let the seller know which horse really interested them, because it would cause the price to go up.
DON’T BLUFF
If you state definitively that a particular price is as far as you can go, then you run two risks: (1) the other side believes you, finds the price unacceptable, and walks away, or (2) the other side does not believe you, calls your bluff, and causes you to either back down and lose credibility or forego the transaction.
BE REASONABLE AND FLEXIBLE
As stated above, taking extreme positions can cause the negotiations to end before they really begin. So, take reasonable positions and be willing to compromise after thorough discussions.
NEVER BID AGAINST YOURSELF
Never bid against yourself. Suppose Buyer bids $7 million and Seller says that the bid is too low to be considered. If Buyer then bids $7.5 million, he would be bidding against himself, which is a foolish thing to do so. Buyer should, instead, refuse to increase his bid until he knows what Seller is looking for. An exception to this rule might be the situation where Buyer thinks Seller may name an absurdly high price, thereby creating a benchmark from which it is difficult to negotiate. Nevertheless, in making any such alternative bid Buyer should increase the bid incrementally. Otherwise, Seller will use the amount of the increment to gauge the limits of Buyer’s authority. If the increment is large, then Seller will conclude that Buyer has the ability/authority to go much higher.
NO BABY STEPS, PLEASE
Despite the foregoing advice about keeping incremental increases small, they should not be too small. As with the childhood game, “Mother May I?,” baby steps will not get you to the objective. For example, if Buyer bids $7 million, and the asking price is $10 million, then increasing the bid to $7.2 doesn’t accomplish much. It is unlikely that such an approach will lead the parties to a mutually agreeable result within any reasonable time frame. And deals have a way of dying if they aren’t completed within a reasonable time. Moreover, tiny concessions on price will encourage the other side to wait for the next concession. So, take a few, bold steps, rather than several baby steps.
BEWARE OF SPLITTING THE DIFFERENCE
When the bidding gets close, avoid the temptation to “split the difference.” For example, if Buyer bids $7.5 million, and Seller bids $8.0 million, then Buyer should not immediately jump to $7.75 million, offering to split the difference. If he does, his new position is $7.75 million, and Seller is still at $8 million. Accordingly, the final number will probably be closer to $8 million than to $7.5 million.
Negotiating and determining the purchase price is usually not based on a single factor. Instead, there are multiple factors that the negotiator must consider, some of which will be more important than others in a given situation. In short, the negotiator must participate in the ultimate balancing act.
