DON’T GET RUN OVER AT THE NEGOTIATING TABLE
Our previous article entitled “Don’t go into business with your head in the clouds” stressed the importance of negotiating skills when starting up, buying, selling or expanding a small business. Get it wrong at the negotiating table and you may be bulldozed into accepting terms you had no intention of conceding to.
By Bob Power
In this segment we consider three sale/purchase transaction case studies with particular emphasis on the negotiating skills of the participants, and the conclusions resulting therefrom, remembering that for each transaction the variable permutations are limitless. In each case study the business concerned was valued at R1 million by an independent auditor.
Case study A – The seller pointed out that his asking price of R1 million was proposed by an auditor following a valuation of the business. Without questioning the valuation and based on a limited due diligence, the buyer agreed to the price which was paid upfront and in full. After takeover many problems came to the fore, but as the wheels started falling off, the seller, with the buyer’s money in hand, was nowhere to be found. The business went bust only six months after takeover.
What we learnt:
- Valuation does not equal selling price. The figure suggested by the auditor is for guidance only. Rarely have I participated in a transaction where the agreement was concluded at the figure placed on the table by the auditor.
- If the buyer accepts the auditor’s suggested price, it is advisable to pay the price in three equal instalments over a one year period. Interest may have to be paid on the outstanding balances, but let the seller ask for it.
- Agree on a reasonable handover period where the seller will stay on in the business to ensure a smooth transition.
Case study B - In this case study the buyer proved a better negotiator. When advised of the price set at R1 million, the buyer thought it too high and elected to carry out an extensive due diligence. The buyer was able to identify numerous problems, based on which he negotiated the price down. He started low, knowing that the seller would keep high. His first offer was R600,000, which the seller countered with an offer of R800,000. The buyer went to R700,000 and they eventually settled at R750,000, conditionally upon the seller staying on for a reasonable period to ensure a smooth transition. It was agreed that the payment would be made in three equal tranches; on signing, after 6 months and after one year. The seller would receive no salary for the period he stayed on and no interest would be payable on the outstanding balance. The seller could perhaps have been better in seeing to his own interests.
What we learnt:
- If the seller’s lowest price is close to the buyer’s highest price, there is a good chance of a successful deal.
Case study C – In this study we address the transaction from the sellers point of view. Although the auditors advised a selling price of R1 million, the seller advertised the business at R1,3 million. The buyer made an opening offer of R900,000 and a deal was eventually struck at R1,1 million. The eventual agreement provided for payment to be made in two tranches, 30 percent on signing and 70 percent six months later, with interest to be paid on the outstanding balance. It also provided the seller with a reasonable salary during the agreed handover period. In this transaction the seller was by far the better negotiator.
What we learnt:
- The seller should start high against the buyer starting low and the better negotiator will triumph.
- The chances of success for a buyer who pays too much for a business, is remote.
Other aspects that require consideration:
In concluding the transaction both the seller and buyer will want to attract as little risk as possible. While the seller wants to limit the warranties and indemnities he has to give in the sale agreement, the buyer wants the opposite.
The buyer wants to buy the business out of the selling company as a going concern, leaving the skeletons in the buyer’s cupboard behind. The seller’s shareholders on the other hand will want to sell their shares so that the buyer takes over the selling company, warts and all.
More points to consider:
You don’t get what you deserve; you get what you negotiate. Think about it.
Avoid being pressurised by time constraints.
Know your shortcomings and utilise your strengths. Don’t try to be something you are not.
After each meeting, record what has been agreed and have it signed-off by the other party at the next meeting.
Express yourself clearly - in writing and verbally.
Be a good listener.
Don’t make an agreement over the telephone.
Always have a witness present.
Do your homework, know your facts, don’t quote unsupportable facts and keep to your agenda.
Be prepared, deal with the easy points first and clarify complicated points.
Don’t beat an issue to death, move on and come back.
Don’t agree piecemeal. Discuss every issue first, then go back to the matters outstanding.
Recap often and always know when to caucus.
Make concessions when it is to your advantage.
Don’t argue over cents.
Don’t rely on the other party’s lawyer’s agreement. Get your own lawyer.
The terms agreed must be correctly recorded in the purchase and sale agreement.
Watch out for too much socialising with the other party.
Stay in the match, don’t close the door.
Walk away if you are not happy.
Negotiate from a position of strength. Don’t be afraid to say NO or ask WHY.
An important tip is that it is always wise to negotiate “Subject to covering all the issues”. This means that although you may have agreed in principle, you are not bound until all points have been covered and agreed upon. This is a good let out if you are not certain.
Negotiating skills can only be gained through experience and cannot be acquired from a book. There is a lot of “bluff” in negotiations and the other party may be a better actor than you.
Trying to break a deadlock is difficult and it is often employed as a ploy by one of the parties to draw a response. While it may be easier said than done, the motto here is “keep calm”. Consider these techniques for breaking a deadlock:
• Try a quick closure
• Change locations
• Give something to get something. Trade that which is low in value to you, but of high importance to the other for something you value highly.
• Use a mediator
• Caucus, when you come back tempers may have calmed
• Recap
• Have a recess
• Walk away, but don’t close the door
In the next issue we encourage you to dig deep as we discuss the importance of conducting a thorough due diligence.
For now we leave you with some good advice from Shakespeare: “He who aspires to little is rewarded with little.”
Power Corporate Consultants
+27 11 880 7850
http://www.powerconsulting.co.za/
By Bob Power
In this segment we consider three sale/purchase transaction case studies with particular emphasis on the negotiating skills of the participants, and the conclusions resulting therefrom, remembering that for each transaction the variable permutations are limitless. In each case study the business concerned was valued at R1 million by an independent auditor.
Case study A – The seller pointed out that his asking price of R1 million was proposed by an auditor following a valuation of the business. Without questioning the valuation and based on a limited due diligence, the buyer agreed to the price which was paid upfront and in full. After takeover many problems came to the fore, but as the wheels started falling off, the seller, with the buyer’s money in hand, was nowhere to be found. The business went bust only six months after takeover.
What we learnt:
- Valuation does not equal selling price. The figure suggested by the auditor is for guidance only. Rarely have I participated in a transaction where the agreement was concluded at the figure placed on the table by the auditor.
- If the buyer accepts the auditor’s suggested price, it is advisable to pay the price in three equal instalments over a one year period. Interest may have to be paid on the outstanding balances, but let the seller ask for it.
- Agree on a reasonable handover period where the seller will stay on in the business to ensure a smooth transition.
Case study B - In this case study the buyer proved a better negotiator. When advised of the price set at R1 million, the buyer thought it too high and elected to carry out an extensive due diligence. The buyer was able to identify numerous problems, based on which he negotiated the price down. He started low, knowing that the seller would keep high. His first offer was R600,000, which the seller countered with an offer of R800,000. The buyer went to R700,000 and they eventually settled at R750,000, conditionally upon the seller staying on for a reasonable period to ensure a smooth transition. It was agreed that the payment would be made in three equal tranches; on signing, after 6 months and after one year. The seller would receive no salary for the period he stayed on and no interest would be payable on the outstanding balance. The seller could perhaps have been better in seeing to his own interests.
What we learnt:
- If the seller’s lowest price is close to the buyer’s highest price, there is a good chance of a successful deal.
Case study C – In this study we address the transaction from the sellers point of view. Although the auditors advised a selling price of R1 million, the seller advertised the business at R1,3 million. The buyer made an opening offer of R900,000 and a deal was eventually struck at R1,1 million. The eventual agreement provided for payment to be made in two tranches, 30 percent on signing and 70 percent six months later, with interest to be paid on the outstanding balance. It also provided the seller with a reasonable salary during the agreed handover period. In this transaction the seller was by far the better negotiator.
What we learnt:
- The seller should start high against the buyer starting low and the better negotiator will triumph.
- The chances of success for a buyer who pays too much for a business, is remote.
Other aspects that require consideration:
In concluding the transaction both the seller and buyer will want to attract as little risk as possible. While the seller wants to limit the warranties and indemnities he has to give in the sale agreement, the buyer wants the opposite.
The buyer wants to buy the business out of the selling company as a going concern, leaving the skeletons in the buyer’s cupboard behind. The seller’s shareholders on the other hand will want to sell their shares so that the buyer takes over the selling company, warts and all.
More points to consider:
You don’t get what you deserve; you get what you negotiate. Think about it.
Avoid being pressurised by time constraints.
Know your shortcomings and utilise your strengths. Don’t try to be something you are not.
After each meeting, record what has been agreed and have it signed-off by the other party at the next meeting.
Express yourself clearly - in writing and verbally.
Be a good listener.
Don’t make an agreement over the telephone.
Always have a witness present.
Do your homework, know your facts, don’t quote unsupportable facts and keep to your agenda.
Be prepared, deal with the easy points first and clarify complicated points.
Don’t beat an issue to death, move on and come back.
Don’t agree piecemeal. Discuss every issue first, then go back to the matters outstanding.
Recap often and always know when to caucus.
Make concessions when it is to your advantage.
Don’t argue over cents.
Don’t rely on the other party’s lawyer’s agreement. Get your own lawyer.
The terms agreed must be correctly recorded in the purchase and sale agreement.
Watch out for too much socialising with the other party.
Stay in the match, don’t close the door.
Walk away if you are not happy.
Negotiate from a position of strength. Don’t be afraid to say NO or ask WHY.
An important tip is that it is always wise to negotiate “Subject to covering all the issues”. This means that although you may have agreed in principle, you are not bound until all points have been covered and agreed upon. This is a good let out if you are not certain.
Negotiating skills can only be gained through experience and cannot be acquired from a book. There is a lot of “bluff” in negotiations and the other party may be a better actor than you.
Trying to break a deadlock is difficult and it is often employed as a ploy by one of the parties to draw a response. While it may be easier said than done, the motto here is “keep calm”. Consider these techniques for breaking a deadlock:
• Try a quick closure
• Change locations
• Give something to get something. Trade that which is low in value to you, but of high importance to the other for something you value highly.
• Use a mediator
• Caucus, when you come back tempers may have calmed
• Recap
• Have a recess
• Walk away, but don’t close the door
In the next issue we encourage you to dig deep as we discuss the importance of conducting a thorough due diligence.
For now we leave you with some good advice from Shakespeare: “He who aspires to little is rewarded with little.”
Power Corporate Consultants
+27 11 880 7850
http://www.powerconsulting.co.za/
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