Mergers and Acquisitions For Dummies (54 page)

If a facility tour is part of the day, take care to not inadvertently tip off otherwise-unsuspecting employees about the potential business sale. Asking a warehouse worker, “So, what would you think if I were your new boss?” is a big no-no! When in doubt, keep your mouth shut.

While walking through Seller's offices or facility, Buyer should pay close attention to the seemingly small things. Is the place clean and organized? Are the employees smiling and happy? Are lights burned out? Any water damage in the ceiling? How clean are the bathrooms? Although these aspects may seem to be rather small, a company that has issues in these areas often has employees (or management) who've simply given up and let things go to seed.

Plan ahead with Seller to determine whether a cover story is necessary. I've often asked Buyers to use the cover story of “We're investors, and we're thinking of investing in your company.” This setup downplays the business-sale aspect but is still an accurate statement.

Reading the Tea Leaves: Did the Meeting Go Well?

Trying to determine whether a meeting went well is a difficult proposition. People are usually polite; regardless of whether they're interested in pursuing a deal, they usually end the meeting by saying something to the effect of, “Thanks for your time; my colleagues and I will confer over the next few days and get back to you with our thoughts.”

Most Sellers will gladly accept an offer from just about any Buyer. If Seller set a meeting, most likely Seller is interested. Judging Buyer's interest level is the trickier job. Here are some clues you as Seller should look for during the meeting:

Was Buyer prepared?
Did she have a marked up copy of the offering document? If Buyer is genuinely interested, she'll come the meeting prepared.

Was Buyer actively engaged in discussions?
Did she ask a lot of questions, or was she otherwise preoccupied? Did she fidget with her phone or constantly shift in her seat? These signs indicate that someone is losing interest and would rather be elsewhere. Spend some time during each meeting looking at Buyers and paying attention to their facial expressions.

What was Buyer's mood and tone?
Was the conversation lively, animated, and frankly, fun? Or did the meeting take on a testy atmosphere? Personal chemistry is often a big part of getting a deal done.

Did the meeting end abruptly, or could you have talked all day?
Another sign of lack of interest is a meeting that ends sooner than you planned. Conversely, a meeting that could easily continue for a few more hours is often a good sign of interest by Buyer.

If you're Seller, the best sign of actual interest from Buyer is to get an LOI. And if you're Buyer, Seller's request for an LOI is a good sign of interest as well.

Part IV

Firming Up the Deal

In this part . . .

T
his part is where the M&A relationship starts to get more serious. I start by covering M&A negotiating and the ever-important issue of valuation. I also detail the Buyer's formal offer (the letter of intent, or LOI) and the due diligence process the Buyer undertakes after submitting that offer. Finally, I delve into some of the main issues of the final, binding purchase agreement.

Chapter 11

An Insider's Guide to M&A Negotiating

In This Chapter

Preparing yourself to negotiate

Knowing which negotiation techniques to use and avoid

Staying on track when the negotiation falters

N
egotiating is the name of the game. A Seller constantly jockeys for a higher price, and a Buyer constantly seeks ways to lower the price. Although these opposing points of view may seem to be at never-ending loggerheads, deals can come to fruition if both sides understand how to negotiate.

In this chapter I introduce you to some of the lessons and tricks I've observed from doing deals. This isn't your father's negotiating book!

Keys to Negotiating Success

Negotiating doesn't only happen during a tidily defined portion of the M&A process. Negotiations occur throughout the entire process, and M&A deal-makers should constantly remember that reality. Successful deal-making can be in the cards for you if you take a look at some key truths I've discovered from doing deals.

Know your position

As I note throughout the book, M&A deal-making is a lot like playing poker. For example, knowing whether you have a weak or strong hand is important because your hand's strength helps dictate how you negotiate the deal. Simply put, a weak hand means you have limited options. Time isn't your friend. Work as quickly as possible to wrap up a deal (but be wary to not appear too desperate because that tips off the other side to your situation.)

A strong hand means that you have more options; time is on your side. However, you still have to play that hand skillfully. Many novices overplay strong hands and end up chasing an otherwise-willing deal-maker on the other side away from the deal.

The worst thing you can do is to misplay a weak hand. I've seen people ruin their careers because they failed to understand the weakness of their position and pressed forward with a bad play.

You hand is weak or strong only in relation to the other hands. Don't just pay attention to your situation; assess the other side's position as well. A strong hand in one situation may be a weak hand in the next deal.

Remember the goal: Closing a deal

The process of buying or selling a business can be a messy affair. M&A insiders call it “making sausage” because it's an ugly process with a tasty end result. (Well, assuming you're not a vegetarian. In that case, think of a messily prepared falafel.)

As a result, those caught in the throes of a negotiation can lose sight of the end result: a closed deal. In fact, the experience of negotiating can be so frustrating that many people simply throw up their hands in frustration and scuttle the process.

But whether you're Buyer or Seller going through the M&A process, set your sights on that final, satisfying goal of closing the deal. Avoid getting testy and try to tamp down the irritability that almost always comes as the result of a heated negotiation.

If you're seemingly at an impasse, tell the folks on the other side that you're not trying to be punitive, capricious, or unreasonable. Tell them that you understand a deal will only get done when it's mutually beneficial to both sides. Ask them to sit down with you, face to face, to try again to hammer out a deal. Seemingly dead deals have been revived because of a willingness of both sides to continue talks toward a creative, mutually beneficial deal. If you need to, hire advisors who have structured deals before.

Negotiate with the decision-maker

The biggest, most important, and most basic negotiating rule is to make sure you negotiate with the actual decision-maker and not an influencer. Of course, speaking with an influencer isn't automatically bad. In many cases, the negotiations advance relatively smoothly.

But in some cases, an influencer who inserts himself into the proceedings may or may not have the authority to negotiate the transaction. These kinds of influencers tend to impede deals; in the best cases, they're overzealous underlings trying to make a splash with their bosses. In the worst cases, they're manipulative head cases following a personal agenda with little or no regard for the company's goals.

In other situations, the actual decision-maker may be hiding behind the influencer. In this example, the influencer is little more than the mouthpiece for the real decision-maker. Typical rants from this person include abrupt and curt ultimatums such as, “We don't think we will negotiate or find middle ground,” or, “We're not going to contemplate your proposal.”

What's going on here is that the decision-maker is using the influencer as a buffer. The decision-maker can easily bark unfiltered orders at the influencer, orders the decision-maker probably wouldn't make if she were speaking directly with you. In turn, the influencer simply parrots the decision-maker by delivering the same message without editing it or moderating its tone. This unfiltered communication, often the hallmark of passive-aggressive types or just someone who can't be bothered to deal with the situation at hand, is highly frustrating.

The best way, and perhaps the only way, to handle this situation is to try to set up a meeting or a conference call with the influencer and the decision-maker. You need to get the influencer out of the way and communicate directly with the decision-maker.

If you're speaking with an influencer and the negotiations are rocky, challenge the person. Simply ask if he is the final decision-maker. If not, ask to speak to that decision-maker. If you still get a block, suggest a meeting with the other side's full team.

Bend where you can

Flexibility wins the day. Know what you want. Rank the most important issues as must-haves. All the rest of the details of a deal are bargaining chips. Use the deal points you don't really need to obtain the concessions you need the most. Don't give away the house, but be willing to bend where you can bend in order to wrap up a deal. If a counteroffer cedes to your main wishes and asks for some concessions for the relatively minor issues, take the deal.

For example, Buyer and Seller invariably have a valuation gap (especially in today's market). If both sides are willing to be creative, structuring can provide a bridge to valuation gaps. Although cash at closing is great (and definitely preferred), Seller may be able to garner a higher price if he is amendable to earn-outs and/or accepting a Seller note. (Head to Chapter 4 for more on these topics).

Although some issues are more important to you than others, never throw away a seemingly unimportant issue. What's unimportant to you may be vitally important to another. That otherwise-worthless issue may end up being currency to help you win a concession you find important.