It's no secret that M&A transactions require negotiations. But what most people don't realize is that how you approach negotiations can determine the success of the overall transaction and your future relationship with the other party. If you have the right mindset, both parties can have a positive experience during negotiations. Larry Forman, Senior Manager at Deloitte, is here to help us understand how to approach M&A negotiations to increase deal success.
“When you’re going through a negotiation, focus on what you really need. It's not about trying to out-negotiate the other party. It's about trying to find a middle ground that works for both sides” - Larry Forman
Approach with the Right Mindset
To get to the right mindset, Larry uses three key pillars of negotiations: Be fair, be open, be empathetic.
- Be fair - Try to find a middle ground because most M&A negotiations are not one-and-done. A long-term relationship is important because there will be further negotiations down the line, and you will most likely be working together post-close.
- Be open and honest - Trust is extremely valuable when it comes to negotiations. Give context to what you're trying to do and why are you negotiating for specific items. The other party will most likely be amicable if they understand you.
- Be empathetic - As you understand the situation and the rationale of the other party, be empathetic to their situation. Building trust and a long-term relationship is key to a successful negotiation.
According to Larry, always give yourself time to think. Don't negotiate on the spot when everybody's heated because you will probably do something that you will regret moving forward.
Advice to Sellers
As a seller, try to do reverse diligence before anything else. It allows you to mitigate risk before you put your business up for sale. And even if you can’t mitigate some of those risks, you will be able to offer mitigating processes for the issues found if you are aware of what they are.
Reverse diligence also limits the surprises during buyers’ diligence that will prevent huge price cuts for your company. You don't want people to think you're hiding something from them. Gaining trust is important as you approach discoveries in due diligence.
Advice to Buyers
Unlike the seller, you have more to consider other than price. There are a lot of negotiations that need to be done from start to finish. Below is a list of the frequently negotiated items during an M&A transaction, and how you should approach them:
Your LOI needs to be clear and precise. It should indicate a price range and explain how the pricing will change depending on due-diligence discoveries. It should include the exclusivity period and how long should the deal last. Also included in this document are the things that you are buying, and what are not included in the sale. That should be explicitly stated.
Furthermore, there are instances where you, as a buyer, would want to secure certain customers from the seller. That alone can be a deal stopper. And even though so it’s generally an issue towards the end, it is important to indicate that early on.
- Sensitive Information
Oftentimes in a technology sale, there is certain information that is highly sensitive and the seller refuses to expose it. What you can do as a buyer is to break down your due diligence into two parts. Proceed with everything else, and towards the end, perform another due diligence for the more sensitive information when the deal is more likely to close. You can also hire a third party to perform the diligence with the permission of the seller.
If the seller still refuses to expose the sensitive information, what you can do is ask for the revenue trends for the past years regarding their top 10 customers. From there, you can see the stability of the business.
- Automatic Assignments
If securing clients matters to you and they don’t have automatic assignment clauses, then this is an area you need to negotiate for. Without violating NDAs, you can have the seller approach their client and inform them of the sale towards the end of the process.
- Golden handcuffs
If retaining key employees is crucial to your transaction, then golden handcuffs are another area you would like to negotiate. You can incentivize the seller for helping you close the deal and getting the commitment from key employees. You can also have the seller pay for the stay bonus and include them in the purchase price.
- Disclosure schedules
Disclosure schedules are meant to define what’s included in the sale and what is not included. And it is important to get this as early as possible so you can review it personally.
Do not pawn it off for the lawyers alone to review. The business sponsor and the financial people have to be the ones to review this because no one knows the business more than he does. If the lawyers are the only ones reviewing this, you will only get a legal point of view of the document.
- Limitations of liability
As a buyer, you shouldn't inherit unlimited liability from the seller and this can be a deal-breaker if not negotiated properly. Negotiate the ceiling of the amount of liability that you are willing to take, and use holdbacks. Put a portion of the purchase price in escrow for an amount of time to ensure that nothing comes up that wasn’t disclosed in the schedules of the transaction document.
A non-compete is also another area that is highly negotiated. Oftentimes, the seller will demand unreasonable non-compete durations. Reasonable durations are 2 to 3 years, 5 years for special cases, but anything more than 5 years is too much.
Also, if you are a large company that is divesting a business unit, watch out for the seller’s definition of your business. There are instances where the seller might define your business too broadly that it might hinder your parent company to operate.