Mergers and Acquisitions For Dummies (19 page)

Desperation:
Nothing spells “weak negotiating position” like the smell of a desperate owner who is desperate to do a deal desperately quick! Desperation often indicates an impending business failure, thus greatly increasing the willingness of the owner to accept a deal, any deal.

Boredom:
A business owner who is bored and wants to move on to something else can unwittingly become a highly motivated Seller. Broadcasting that boredom to potential Buyers puts those Buyers in a huge power position.

Time:
Time is the wild card in the motivation game. A Seller who wants (or needs) to do a deal right now will likely cede power to Buyer. Conversely, the longer the process takes, the more the power may flow back to Seller because Buyer becomes the one who has invested time and money and increasingly needs to get the deal across the finish line.

Money:
Deals don't get done for free. Buyer and Seller have to retain advisers. The more money one side spends, the more that side (often Buyer) wants to get a deal done so as to not waste that money. Buyers are most often guilty of overspending.

The more money a side spends during the process, the greater the odds are that that side will want to get a deal, any deal, across the finish line. No one wants to spend money and have nothing to show for it.

Understanding who has power

Typically, Seller has a lot of power early in the process. As the party being courted, Seller controls whether meetings occur and whether information is exchanged.

One way Buyers can get more power early in the process is by submitting a
pre-emptive bid
,
making a bid before other Buyers have made their bids and knocking out all other possible suitors. Eliminating competition is a boon for any Buyer and puts Seller in a vulnerable position. If Buyer subsequently decides against closing a deal, Seller has lost time otherwise spent talking with multiple Buyers and thus finds itself back at square one.

Even without a pre-emptive bid, the power balance swings toward Buyer when the parties sign an LOI with an exclusivity clause. (You can brush up more on these terms in “Step 8: Write or review the letter of intent” earlier in the chapter.) At this point, Seller can no longer speak with other Buyers.

If Seller accepts a pre-emptive bid from Buyer, Seller should insist on removing the exclusivity clause from the LOI. Short of that, Seller should include language in the LOI that ends the exclusivity period and allows the Seller to speak with other Buyers in the event that Buyer attempts to change the price or terms of the deal.

From the signing of the LOI through closing, Buyer most often calls the shots. However, the longer the due diligence and purchase agreement drafting takes, the more the power may shift back toward Seller because Buyer is investing more and more money as the process goes on.

Some Buyers, most notoriously private equity (PE) firms, retain advisors whom they pay after the deal closes. The longer the process takes, the more those bills accumulate. PE firms typically pay those bills with the proceeds from the closing. And guess what? The PE firm managers making all of these decisions probably don't have the money at ready access; they need to request cash from various sources (the fund itself, the fund's limited partners, and other lending sources such as banks).

If a deal falls apart and doesn't close, the firm employees working that deal probably don't have the ability to simply write checks. They have to go back to their bosses, tails between their legs, and ask for money. The employee's spiel goes something like the following (apologies to Monty Python's “Dead Parrot” sketch):

Hi, boss. Bad news. The deal is no more. It has ceased to be. The deal expired and has gone to meet its maker. It's an ex-deal. Can I have a couple hundred grand to pay off all the professional services firms that did all kinds of work on this deal that turned out to be all for naught?

As you can imagine, that's not an enviable position to be in.

To give you a visual of all these power shifts, Figure 3-1 details who has the power in the various steps of the M&A process. For more on the steps themselves, check out “Take Note! The M&A Process in a Nutshell” earlier in this chapter.

Reading the other party's situation

Whether you're a Buyer or Seller, in any sale process you want to be able to read your opponent like a poker player. You want to know whether you're in a strong position or a weak position. The stronger your position, the greater your negotiating leverage.

The four positions are as follows:

You have a strong position and your opponent knows it.
This situation is where you may need the most skill. You have the upper hand, but if you push too hard, you lose the deal or get a less-than-ideal return. In poker, if the table knows a person has a great hand, all the other players fold. Although he wins that game, the strong hand can win bigger by downplaying his hand and keeping the other players betting for longer.