Negotiations are integral to any M&A transaction or business dealing. With both buyers and sellers striving for their own desired outcomes with minimal risk or loss, it can be daunting to ensure you’re being represented fairly and your goals are being fought for adequately. Having these three elements in place before you come to – and while you are at – the table can help make the negotiation more successful and create wins for both sides.
1. Expectations. Whether you’re the buyer or the seller, always be up front about your goals in a transaction as they relate to valuation, major concerns, business philosophies, post-integration, and strategy. If you’re the buyer and a publicly traded entity and the top priorities are sales and earnings growth, then don’t hide that fact. Otherwise, the seller will get confused and frustrated with certain business philosophies and/or practices post-deal. If you’re a seller and looking to exit the business one to three years down the road, then let the buyer know that up front. Then both of you can work to identify a successor going forward.
The key: Eliminate surprises and keep expectations in check or things can get out of hand quickly. A good advisor can address some of these things in a term sheet that highlights the seller or buyer’s “hot buttons.”
2. Don’t change the deal. Unless it is explicitly in writing (as in a term sheet) and is deemed to be a material change to the economics for either party, then leave things as they are or either party can walk away for philosophical reasons without causing bad feelings. Some people subscribe to the philosophy of “I can throw something out there and see if it sticks.” They think that if the other party accepts, then ok. If not, they can put the original deal back on the table and all should be good. On the buy side, some of the best deals I have done were the ones I walked from because the seller tried to materially change the terms/economics at the 11th hour.
A good advisor will earn their keep by reminding both parties of the original deal and the spirit and original intent of the deal. Also, it is important that your accountants and lawyers stick to the deal as well.
3. Everybody knows his or her role. This includes management (non-owners) and accountants and lawyers on both sides. Lawyers and accountants are a necessary part of a transaction. However, they are rarely brought to the table to “negotiate” a transaction. They need to know from their client what their focus should be. For the accountants of the buyer, it could be verifying the seller’s balance sheet focusing on major items such as inventory valuation and collectability of receivables. For the seller, it could be the tax consequences of the deal structure (e.g., asset versus stock purchase). For buyer’s lawyers, it could be lien searches, the bill of sale, and adequate representations and warranties of the seller. For the seller, it could be the bill of sale, corporate minutes, non-competition clauses, representation and warranties and the indemnification.
Remember, the buyer and seller know their business better than anyone else, so setting expectations up front is key for their legal and accounting teams. Plus, these teams get paid whether a transaction gets completed or not, so you don’t want them in a lead role if at all possible. A good advisor can help with these expectations and save either party thousands of dollars in professional fees (or more) in a deal.
If you have potential M&A negotiations in the works, an advisor can help ensure these elements are in place and you are positioned to achieve the best possible scenario while keeping the other parties interests in mind as well. With experienced guidance, wins can be achieved on both sides of the table.
Steve Pomeroy is the founder of Big Change Advisors, a unique M&A consulting firm in Los Angeles that helps businesses achieve big goals while making a big impact on society. To request a free consultation, contact us.