Dr McDeal title Hone your negotiating skills

I am about to enter into negotiations with a potential purchaser of my business.How should I prepare?

First, be quite clear on the strengths and weaknesses of your business. This will enable you to “sell the sizzle” convincingly and tackle the more difficult questions when they arise. Secondly, research valuations and deal structures for recent transactions involving similar businesses. Work out what makes businesses more or less attractive in your sector. Be familiar with the deals concluded recently by your potential purchaser and understand the rationale for those transactions.

Finally, be clear why the potential purchaser ought to have an interest in you. Where synergy savings or cross-selling opportunities are involved, understand them completely. Estimate the possible advantages of bringing the two businesses together. This will aid in negotiations by allowing you to focus on the upside and in subsequent due diligence.

The other side is pressuring me to give an indication of the price I want. Should I?

It is generally not in any vendor’s interest to give a premature indication of value. To do so risks placing a ceiling upon your own price aspirations, and it may be taken as a sign of weakness. It is usually better to insist that potential purchasers value the business on the basis of what it is worth to them and to make their offer without any guidance from you. You can then assess the strength of your position before making a response. If a potential purchaser is genuinely serious, they will be prepared to go first on price. You may be pleasantly surprised at the level of offers.

Having received offers, if the level of interest is weak, it may then be appropriate to set an asking price, as this will enable you to assess quickly your prospects of a successful outcome. If the interest is strong, request further improvements before revealing your hand.

I have received an approach. Should I restrict my discussions to one party or widen the field?

Where you are able to generate competitive interest for an attractive business, the best offer may well be 50 per cent better than the lowest offer, and often even more. If you are dealing with only one potential purchaser, you may find it hard to assess whether their offer is the best you can achieve. You will be less likely to have a fall-back purchaser in the event that subsequent negotiations prove unsatisfactory.

Discussions with one party have a greater chance of success when both parties know each other well. In this case, the advantages of bringing the businesses together can be assessed by both sides with greater certainty. However, before committing yourself to this route, make sure that these advantages are achievable and that they have been reflected in an offer for the business that is markedly better than what would be available from a purchaser with less clear-cut advantages.

I have had preliminary discussions with a number of purchasers. One of them has offered a good price but wants immediate exclusivity.What should I do?

As a general rule, it is better to resist exclusivity until all the major commercial aspects of the deal have been agreed. The headline price will be the most important aspect of this, but you should also consider any deferred or contingent aspect to the deal - and other matters such as property complications or restrictions placed on the vendor after the deal has been concluded.

Consider whether the potential purchaser knows the business well enough to follow through with an apparently attractive offer. Your negotiating position is likely to reduce once exclusivity has been granted, so resolve these issues
early on. Be especially wary of purchasers who make an attractive offer in order to gain exclusivity with the intention of using due diligence to reduce the price later.

I am well advanced in negotiations with a preferred purchaser, but have recently received bad news concerning an important customer.What should I do?

Most purchasers take their due diligence seriously, so expect them to find out sooner or later. They may also seek some form of warranty cover that effectively forces you to make a disclosure. It is generally better to bring this information to their attention on your own initiative. Do not do so, however, until you are sure of its extent and effect. Understand why things went wrong and what can be done to rectify or prevent recurrence. Calculate the effect it will have on your business in detail and present the outcome to the potential purchaser in as positive a light as possible. Require them to give their definitive response as soon as possible. Do not allow them to store this issue for a later negotiation.

How do I protect myself from the deal being renegotiated at the eleventh hour?

Always stay on good terms with the bidder who came in second - you never know when you might need them. Be careful not to leave bad news to be discovered when the purchaser has gone into exclusivity - they may well be tempted to exploit it. Ensure that when you sign heads of agreement there are very few issues remaining to be agreed. Make clear to the purchaser that there are only two possible outcomes: that they are happy with the outcome of their due diligence and complete the deal as agreed, or they decide not to do the deal at all. Do not allow re-negotiation of the deal to become a third option. Give yourself the right to terminate exclusivity if at any point the purchaser cannot confirm their intention to complete the deal on the agreed terms. Limit the period between signing heads and completion - you won’t be given credit for good news, so minimise the opportunity for bad news.