As the saying goes, “Money talks. . . .” But, does it always tell the truth? Is the success of an acquisition determined solely by the price that you either pay or receive? Obviously, there is more to negotiating an acquisition than deciding on the purchase price. In fact, a friend of mine, who is a very successful real estate developer, says, “I’ll let the other guy set the price, if I can set the terms.” Clearly, the terms of an acquisition other than price can make or break an acquisition.
This article is the final part 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. The second article addressed the negotiation of the purchase price. This last article examines the process of negotiating important deal terms other than price.
Most of the non-price terms of an M&A transaction are found in the acquisition agreement. It is normally negotiated by the lawyers for the parties and contains representations and warranties, covenants, conditions to closing, and indemnification provisions. The fine points of these provisions can have a significant impact on whether, in the long run, the parties deem the transaction to be a good one or a bad one. When negotiating these points, the parties and their lawyers should:
- Remember that the transaction is a business deal between business people, not an intellectual jousting match between lawyers.
- Evaluate, both prior to and during the negotiations, the leverage you have vis à vis the other side and try to position yourself to maximize that leverage.
- Solve problems that arise through the art of compromise.
THE KEY PEOPLE
Never lose sight of who the key people are. If the lawyers involved in a transaction try to reach a compromise without involving their respective clients, they may find that they have spent a lot of time and effort on a transaction that isn’t going to close. It is particularly important to consider the perspective and feelings of a seller who is also the principal owner and who is selling a business that has been his or her life’s work.
Lawyers, especially those with less experience, can get their egos tied up in a transaction. If that happens, legal expenses can skyrocket. It is important for the business people to remain involved in the negotiations, in order to prevent lawyers from haggling endlessly over provisions that are unlikely to matter in the final analysis. Inexperienced lawyers are often reluctant to deviate from their “firm form document” and wind up arguing over language that has little relevance to the transaction at hand. For example, haggling over an environmental provision makes little sense if the seller’s only real estate interests are leases of office space. Ensure that your lawyer understands that you want him or her to come to you if negotiations bog down. After listening to an explanation of the dispute and the risks involved, you may be able to break the impasse by discussing the matter with your counterpart on the other side, especially if the other side’s lawyer is behaving like a “deal breaker.”
Negotiation difficulties are not always the product of a lawyer’s ego or inexperience however. Occasionally, lawyers are unfairly labeled as “deal breakers.” Consider how the negotiation process proceeds. After the business people negotiate the price and a rough outline of the transaction, lawyers are asked to “flesh out” the deal. They ask tough questions about issues that the parties have failed to consider, such as covenants not to compete, escrows, and security for payments to be made in the future. Because transactional lawyers are paid to worry about what can go wrong in the future, they sometimes appear to be overly negative. Consequently, the business person needs to remain involved in the negotiations in order to modulate that negativism. If the lawyer’s negativism gets out of hand, it can destroy the transaction. Therefore, a business person needs to be able to distinguish between a lawyer who acts constructively by apprising him or her of problems and issues and offering suggestions and ideas for solving them and a lawyer who simply nitpicks.
Whether you are a lawyer or a business person, you should have a clear understanding of who the real decision maker is on the other side. Don’t waste energy or arguments on someone who is not in a position to make the final decision. Never make a concession in the interest of achieving a compromise, unless the person with whom you are negotiating has the authority to bind the other side.
LEVERAGE
Throughout the process of negotiating a transaction, you must continually evaluate what leverage you have relative to the other party on a particular issue.
One of the most important sources of leverage in an M&A transaction is to draft the documents. If you have the opportunity to draft one or more of the documents in a transaction, seize it. The provisions of the documents set the agenda for the negotiations, which is a tremendous advantage. Although the other side will object to many of the provisions, and concessions will have to be made, the final document will still be closer to its original form than anything the other side would have offered. Normally, however, the buyer will draft most of the documents.
When drafting a document, you should remember that overreaching provisions rarely survive and may cause the negotiations to be unnecessarily bitter and protracted. The real art of drafting is to accomplish your objective in a manner that is so subtle that the other party doesn’t even realize it. That is not to say, however, that duplicitous conduct is advisable. On the contrary, because the parties will have to deal with each other long after the closing, it is important that each side believe it has been treated fairly and honestly. Otherwise, you are merely planting seeds that could grow into huge conflicts in the future.
Avoid labeling a position as “non-negotiable.” Everything is negotiable. If you are later forced to compromise your position, you will lose credibility. Nevertheless, you must also stand firm on positions that are important to you. It doesn’t require yelling or histrionics, it simply requires being resolute. And don’t let the other party know which issues are important to you. You may be able to get a concession from the other side by agreeing to concede on a point that really doesn’t matter to you.
Knowing when to concede a point is important. You can lose credibility and destroy the spirit of cooperation by holding fast to a position that lacks any apparent justification. Alternatively, if your position has merit but is one you are prepared to concede, ensure that you don’t give it away for nothing. You should also avoid the temptation to compromise issues one by one. The big issues are usually resolved as part of a “package deal,” with give and take on each side. So, make sure there is a final resolution of all the big issues before you agree to a compromise on any one of them.
Another factor affecting leverage is time. If you have a deadline and the other party is aware of it, you can be sure that few, if any, concessions will occur prior to that deadline. It is important to convey to the other side that you have all the time in the world to do the transaction. Never show up at an out-of-town negotiating session with your luggage in hand and your return ticket in your breast pocket. If in fact you are facing a deadline, and need to develop a sense of urgency in the negotiations, then you must convey to the other side that you have other options, including not doing the deal at all. At the same time, you need to keep the negotiations in perspective and make appropriate compromises on issues that aren’t as important as your basic points. This is the essence of the art of compromise. As the gambler said, “You’ve got to know when to hold them, know when to fold them, know when to walk away, and know when to run.”
THE ART OF COMPROMISE
We’ve all heard the story of two kids fighting over the last bit of pie, with each insisting that he be allowed to cut his slice first. Mom, with the wisdom of Solomon, says, “I don’t care who cuts the pie into two pieces, but whoever does must give the other the right to select which piece he wants.” In negotiating a particular issue in a transaction, the needs of the parties are often not in opposition. If they shift their focus from defeating each other to defeating the problem, they can achieve what is commonly called a “win-win solution.”
I have negotiated with many people who view negotiations as a win-lose proposition. They believe that if I win, then they lose, and so they need to make me lose so that they can win. Besides making it extremely difficult to reach a consensus on any issue, such a philosophy merely plants the seeds for future conflict. The old saying, “What goes around comes around” is definitely true in business dealings. If a party is deceived or forced to accept truly egregious terms, then following the closing, he’ll spend a lot of energy trying to find ways to even the score. Alternatively, a party who participated in fair and open negotiations will be more likely to accept his fate, even if the transaction failed to turn out the way he expected. He’ll be more likely to admit to himself and others: “Well, that’s what I agreed to.”
Therefore, when trying to resolve issues by compromise, look for the win-win solution.
When seeking compromise, it is important to distinguish between a party’s stated position on an issue and the party’s real needs, which are often very different. Ask questions and listen carefully to what the other side says and doesn’t say for clues concerning his or her true needs. Fashioning a solution that addresses the real needs of both parties is the key to reaching a compromise. Realize, however, that the more the other party learns about your needs, the more your leverage will diminish. As discussed above, knowledge is power. So, be careful what you reveal about your own position, while you’re trying to learn as much as you can about the other party’s. Finally, if possible, use ideas of the other party and “piggyback” on them, adding what you need to something the other side suggested. This technique can turn adversarial negotiations into collaborations.
RECAP
There are, of course, many techniques that you can employ when negotiating. The purpose of this article is not to try to list them all, but rather to discuss briefly some broad themes that are essential to effective negotiating. By keeping the key players involved in the negotiations and focused on the goal, by continually evaluating your leverage relative to the other side, and by looking for the win-win solution to problems that arise, you will foster a negotiating process that will lead to a mutually satisfying result. Good luck.
Bill Venema is the Practice Area Leader for Business Law in the Atlanta office of Holland & Knight LLP, a multi-national law firm with over 1,250 attorneys. He specializes in mergers and acquisitions, corporate and securities law, and the licensing of intellectual property. His clients include start-up companies and venture capitalists, as well as large multi-national corporations. He is a frequent speaker at seminars, has been practicing law for over 20 years, and is a graduate of the University of Virginia School of Law. In addition to his law degree, Bill earned an MBA from Georgia State University and a BS (Engineering) from the U.S. Military Academy at West Point. Before entering private practice, Bill was an Army officer in Germany, the Republic of Panama, and various stateside assignments. You can contact Bill at wvenema@hklaw.com or by calling 404-817-8581.
Copyright © 2002 by William H. Venema
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