M&A Negotiation

M&A negotiation: we'll discuss important negotiating takeaways in a mergers & acquisitions deal. This is for lower middle market business owners to learn how to strike a favorable deal.

There is a lot to think about and a lot to consider when you're thinking about selling your business. You probably wish you could be dispassionate about selling your business, but it represents your life's work.

Knowing how to begin the selling process might be challenging, even if the moment is ideal.

• How can you and your team best get ready?
• When valuing your company, How do you know what price is right?
• How serious are potential purchasers likely to be about making a purchase?

Passing the reins of your business to a new leader is a significant life event, especially if it has been a major part of your life up until this point. The sale of a business is not a quick and straightforward process and negotiating the deal may take anywhere from five to 10 years.

A merger or acquisition is one of the most common ways for a company to be sold.

Two of the most misunderstood terms in business are "merger" and "acquisition." Both names may be used to describe the coming together of two businesses, but there are important distinctions between them.

Any time two or more organizations join forces to form a single one, we call it a merger. In contrast, an acquisition is the process of one company acquiring another. To increase profitability for stockholders, some businesses engage in mergers and acquisitions to broaden their customer base or increase their market share. M&A negotiations are different from most types of negotiations you have done before. 

In this piece, we'll discuss the importance of negotiating in a Mergers & Acquisitions deal and provide advice on how to strike a favorable deal. Knowing how to negotiate business deals and use various M&A negotiation tactics will help you achieve your goals.

Win-Win Tactic 

To negotiate in a way that benefits both parties, or "win-win," one must first thoroughly investigate their position and that of their counterpart to reach an agreement. It's a win-win situation if both parties feel they came out ahead in the transaction.

Win-win transactions occur when both parties are willing to give and take, like in the case of buying and selling. If this is not possible and one of you has to make way, it is reasonable to discuss payment for the inconvenience. In spite of it, everyone involved should be satisfied with the result.

Types of Win-Win Strategies

Here are some of the most common types of win-win strategies used during negotiations:

Managing Expectations

Keeping everyone's hopes and fears in check during a deal negotiation is a sure way to reach a mutually beneficial agreement. In a win-win negotiation, it's crucial not to raise the other party's expectations by making major concessions too soon. You may increase the likelihood of a positive result from contract negotiations by making only minor compromises at the outset.

Just being patient might help you moderate your expectations for the result. The opposite party to a transaction may second-guess the offer's quality if it is accepted right away. Simply letting the other party know that you've reviewed the arrangement or making a few little adjustments may go a long way toward ensuring that everyone is happy with the final result.

Outcome Perception

In a negotiation, each side looks out for its own interests while also considering those of the other participants. It's common for parties to be amenable to compromise so long as they each get something out of it. To establish a win-win scenario, it's necessary to talk modestly about your advantages and thank the other party for their effort to preserve a favorable atmosphere for everyone involved.

Presentation of Multiple Offers

One winning method is to provide many options that are, in your opinion, equally good. Giving your opponents a choice between different offerings might help you figure out what they care about most. This knowledge is vital for future talks. This tactic will also help you stress your adaptability, openness, and willingness to satisfy the needs of the other parties involved in the negotiation.

Hardball Tactics 

In a negotiation, hardball techniques are employed to immediately establish a combative atmosphere. To use pressure in a negotiation is to try to persuade or otherwise influence the other side into altering their goals, expectations, or stance.

As a general rule, hardball strategies are not well welcomed during negotiations and should be employed rarely. However, these tactics might be helpful in one-time transactions if neither party hopes to establish a long-term partnership.

In addition, unique competitive techniques used as part of a mix of cooperative activities may be beneficial and not negatively perceived.

Types of Hardball Tactics

• Extreme demands are followed up by small, slow concessions. This strategy, which may be the most popular hard-bargaining method, is meant to prevent the parties involved from giving too much ground too soon. However, it might prevent parties from reaching an agreement and prolong commercial conversations needlessly.

• Commitment tactics. It's possible your opponent may claim he can't do anything to bargain with you because of external factors. Take any and all measures necessary to verify the authenticity of these declarations of devotion. It's possible that you'll need to bargain with a higher-up in order to close a deal.

• Take-it-or-leave-it negotiation strategy. Offers shouldn't usually be non-negotiable. In order to neutralize this hard-bargaining strategy, you should disregard the tone of the request and concentrate on the substance instead, after which you should make a counteroffer that satisfies the requirements of both sides.

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Win-Lose Tactics

Getting your way in negotiation might be perceived as driving a hard bargain or even defeating the other party. While negotiating may help one party accomplish its goals in the near term, it is ultimately a lose-lose strategy.

Because of this, when one side triumphs, the other loses, and their relationship may suffer as a result. Relationships are more likely to terminate, individuals are more likely to walk away or refuse to work with the "winners" again, and the negotiation process is more likely to finish in a harsh argument.

Most people are at least somewhat acquainted with win-lose negotiations. Each party decides what they want and then takes a hard stance, such as demanding more from the other side than they are willing to give.

Win-lose tactic examples

A win-lose situation can happen in a number of ways.

• When one side focuses only on its own success, without considering the other's interests, a win-lose dynamic may develop.

• It might also happen if one side believes that reaching any form of compromise is their last hope, in which case they could be pushed beyond their breaking point or be convinced to bargain against their own interests.

• It might also be the consequence of other causes, such as coercion or a disparity in the facts known by the parties. As a result, one side will have greater weight and, in most cases, emerge victorious.

If any of these conditions or circumstances exist together, a win-lose scenario is almost certain to develop. Reluctance to cooperate, with each side looking out for their own interests until one side wins or loses, is a common early indicator of such a scenario. In addition, distributive negotiations, where parties are bargaining for a fixed sum of money or on one interest, are particularly prone to win-lose scenarios since each loss for one side is again for the other.

Ten Tips To Get Your M&A Negotiation in Ship-Shape

Here are ten tips for becoming a master negotiator. 

Know Your Business 

Before going into any negotiation, it is crucial to have a thorough understanding of your business and its strengths and shortcomings. You should be ready to explain why your business is important and what steps are necessary to finalize a merger or acquisition.

The company you're doing business with will be better able to use your strengths and benefit from your resources if they have a thorough grasp of your organization. It simplifies things immensely.

Have a Realistic Valuation in Mind

If you want to sell a business, it's crucial that you set realistic goals for its valuation. Frustration on both sides of the bargaining table might result from you overestimating the worth of your company. 

Two common examples of it.

1. You may have very low valuation expectations.
2. You may have valuation expectations that are way too high.

In the first scenario, you don't put enough value on your business and accept the first offer that comes your way. Further complicating things is the fact that you likely will accept a contract structure that prioritizes the buyer's interests above your own due to your lack of familiarity with such topics. You take two blows at once!

In the second scenario, you may be missing out on some excellent bargains because your valuation standards are so much higher than the market is willing to bear. When your pride and ego are hurt by what you regard to be "lowball" proposals, you may quit negotiating with someone who may be a great acquirer for your company.

But at the end of the day, a business is only worth as much as the present value of the cash flows that are expected in the future. An independent appraisal can help you see through the hype and give you the confidence to move forward with a fair and reasonable offer.

Have a solid financial foundation: 

Any business intending to negotiate an M&A deal must have a solid financial base. A prospective buyer will want to see that you have a clean financial slate and can prove it with correct books and records.

The financial success of your business is a crucial means to verify and quantify value and so define and agree upon a price to be paid and is thus irrelevant in almost all transactions. Current and future financial performance is often more influential than other factors (such as market position, maturity, sector, IP, etc.) in determining the price.

There has to be uniformity in the accounting practices used across all financial reports to provide an honest depiction of the finances of the company. It is important to clarify any discrepancies between the Management Accounts and the Statutory filed Accounts before a prospective buyer asks about them.

Stay Organized

Keeping track of all the critical information about your business can be challenging, but it's a must if you want to successfully negotiate an M&A deal. Collect all the required paperwork, such as tax returns, contracts, and a list of your clients and suppliers.

Make sure your buyer can quickly find whatever details they need to make a choice, regardless of how you've organized the data. Success in an M&A deal also depends on clearly articulating your company's approach to operations. 

Have a Clear Vision for the Future: 

Buyers want to be confident that they are acquiring a company with a solid plan for the future. Be prepared to articulate your long-term vision for the business and how you see it growing in the future. 

Making use of papers like market analysis, competition analysis, and others that may back up your firm's vision, you can create a corporate road map that lays out where you want to take your organization.

Building a detailed and well-thought-out roadmap will help you map out the steps to actually implementing the ideas in your company strategy. The big picture is visible to both stakeholders and individual contributors.

Build Relationships With Potential Buyers: 

Business is about relationships. It is crucial to building relationships with potential buyers well before you start negotiations. This will help ensure that you have a number of interested parties when it comes time to sell. 

Ways you create a great relationship with your potential buyers.

• Communicate: Communication is the cornerstone of every successful business engagement with potential buyers.
• Identify How You Can Provide Additional Value: Discover areas of agreement and consider how you could use each other's time, money, or knowledge.
•  Focus On Mutual Success Give genuine effort to helping others succeed. Working with someone who is just interested in themselves is a turnoff. Business relationships flourish when both parties are committed to their mutual success.

Stay Informed About Industry Trends

Keeping tabs on industry trends will help you stay ahead of the curve and be better positioned for potential negotiations. Knowledge is power, so make sure you know as much as possible about the market conditions affecting your industry.

Two ways you can keep updated on industry trends:

• Take advantage of industry research and trends reports. Reading research papers or solution guides is an easy way to improve your ability to spot trends. If you take the time to read beyond the executive summary, you can usually always discover something valuable and relevant to what's happening right now in your market in a report compiled by industry professionals who conducted original research.

• Use different tools and analytics systems to identify the direction trends are heading. Various tools and metrics will be helpful to you in identifying trends depending on your sector, audience, objectives, and even business size.

Have Realistic Expectations: 

Remember that not every deal will result in a perfect fit for both parties involved. It is important to remain flexible throughout the negotiation process and be willing to compromise on specific points.

Be Prepared for Bumps in the Road: 

Deals can often get derailed during negotiations due to unforeseen circumstances. Make sure you have a backup plan in place in case things go awry and are prepared for potential roadblocks along the way. 

Hire an Experienced M&A Advisor: 

Having an experienced sell-side advisor by your side can be invaluable during the negotiation process. They will have extensive knowledge of the industry and can help guide you through every step of the negotiation process. 

Hiring an M&A counsel will free up your time to concentrate on expanding your business rather than searching for investors or communicating with potential buyers. 

Moreover, lower middle market business brokers may help you do the following: 

• Overcome difficulties in the deal. 
• Help you reach a wider audience of potential customers.

M&A Negotiation Process 

The process of negotiating a sell-side M&A deal is typically a long and arduous one. It can often take months, or even years, to negotiate all the various terms and conditions of the sale. The following is a brief overview of the key steps in the M&A negotiation process: 

Initial Inquiry

The first step is for the seller to receive an inquiry from a potential buyer. This can come in the form of a letter of interest or a more formal proposal. 

In mergers and acquisitions, a letter of intent (LOI) is a non-binding contract outlining the general terms and conditions of a potential company transaction between a buyer and a seller. It is essential that both parties sign the LOI before the buyer can go on with the "due diligence" phase of the purchase process.

Confidentiality Agreement: 

Once both parties have agreed to move forward, they will enter into a confidentiality agreement to keep the details of the negotiations confidential. 

Due Diligence

The next stage is for the buyer to undertake due diligence on the firm. To authenticate all material facts and financial information and to verify anything else brought up throughout the M&A transaction or investment process, due diligence is the process of verification, inquiry, or audit. Before a sale is finalized, the buyer does due diligence to gain confidence in the transaction.

M&A Negotiation of Terms

Once due diligence is complete, the parties will begin negotiating the M&A deal structure. This can include things like the purchase price, closing date, and any warranties or representations that the seller will make about the business. 

The Signing of the M&A Agreement: 

Once all the deal structuring is complete, both parties will sign a definitive agreement formally finalizing the sale. 

Conclusion

If you are a retiring business owner looking to exit your lower middle market business in California, here are five tips to get you started:

1. Don't wait until the last minute to start planning your exit. The process of selling a lower middle market business can take a long time, so it's important to start early.

2. Have a clear idea of what you want to get out of the sale. Know your goals and what you're willing to negotiate.

3. Choose the right type of buyer. Not all buyers are created equal, so do your research and find the right one for your business.

4. Be prepared for a lot of due diligence. M&A buy-side due diligence is when buyers will want to know everything about your business, so be ready to provide documentation and answer questions.

5. Be flexible with the terms and conditions of the deal. It's important to be open to negotiation to get the best possible deal for your business.

Rogerson Business Services, also known as, California's lower middle market business broker is a sell-side M&A advisory firm that has closed many of lower middle-market deals in California. We are dedicated to helping our clients maximize value and achieve their desired outcomes. 

We have a deep understanding of the Californian market and an extensive network of buyers, which allows us to get the best possible price for our clients. We also provide comprehensive support throughout the entire process, from initial valuation to post-closing integration. 

Our hands-on approach and commitment to our client's success set us apart from other firms in the industry. If you consider selling your lower middle market business, we would be honored to help you navigate the process and realize your goals.

If you have decided to value and then sell your lower middle market business or still not ready, get started here, or call Andrew Rogerson, Certified M&A Advisor, so we can understand your pain points better and prioritize your inquiry with Rogerson Business Services, RBS Advisors.

This is part of hiring an M&A deal team tips to answer some FAQs about the deal structure & transaction series ->