‘Win-Win’ Transactions: Keys to Successful M&A Negotiations

Both Buyers and Sellers Should Follow a Careful Process to Realize a Successful Transaction. Here are Some Tips

A successful business sale will ideally leave both the buyer and seller feeling the transaction was a success. Charles Andrews recaps questions that he asks sellers before accepting an engagement as a transaction advisor and lists ten steps defining a business sale process most likely to satisfy both buyer and seller.

The term “win-win,” like many business terms, is excessively used to describe a negotiation’s ideal conclusion. Because of this, we feel the need to provide two caveats.

The “size matters” caveat: the larger the deal, the more resources both parties have available to influence the outcome. This article will focus on transactions in the $10 million to $100 million range.

The “time matters” caveat: the two most common phrases in the transaction world are: “Time is of the essence” and “Deals that drag out don’t happen,” so acknowledge the impact of timeliness. Usually, it’s easy to recognize delays in the negotiation process when both parties prioritize completing the deal. Delays are red flags and may indicate a ploy or lack of original motivation (more on this later).

The following is what we ask sellers prior to accepting an engagement:

• Can you answer the question, “Why are you selling?” and “What will you do after you sell?” with little or no hesitation?
• Do you have a team of advisors that is experienced in selling businesses, and will you include it in the planning process?
• Do you understand why a fair market valuation is important to establish a benchmark for a minimally acceptable deal?
• Are you focused on “cash at closing” or do you understand the value of “deal structure” and its impact on negotiations?
• Is this the best time for you to sell to leverage tax benefits, market conditions, and the buyer’s financing challenges?

Today’s buyers must follow a process that will allow them to find the right business, meet their financial objectives, and achieve forecast goals.

Both buyers and sellers should follow a process that prepares them for a “win-win” transaction:

1. Establish a Reasonable Price on the Business
The seller should pick a minimum price that he or she is ready and willing to receive and let the process work to exceed that price, but maintain the “expectation of the minimum.”

2. Allow the Seller to Carry on “Business as Usual”
“Today’s buyers must follow a process that will allow them to find the right business, meet their financial objectives, and achieve forecast goals.”

Do not allow the client to become too preoccupied with the transaction. Distractions may cause the client’s attention to waver from day-to-day demands and negatively affect sales, costs, and profits.

3. Engage an Expert Intermediary
Their platform for maximizing a transaction’s success is rooted in confidentiality and efficiency.

4. Prepare for the Sale Well in Advance
Preparation is the most effective negotiating tool for minimizing wasted time, maintaining credibility, and shortening due diligence.

5. Anticipate Information that Sellers May Require
This is the first step to putting yourself in the seller’s shoes.  Be aware that a lack of quality information is the leading cause for lengthy or lost negotiations.

6. Achieve Leverage through Competitive Analysis
Understanding the target seller’s competitors, alternative acquisitions, and industry conditions can significantly improve your position.

 7. Be Flexible.
An intermediary should inform you of the areas where flexibility will impact both price and time to close.  And, remember rule 1.

 8. Negotiate—Don’t Dominate
The negotiation process you have previously used to acquire businesses or products is an asset and provides you with the knowledge to understand the give and take of deals. However, the stakes (and emotions) that are involved are higher and require assistance from your advisors.

9. Keeping Time from Dragging Down the Deal
To maintain the momentum, work with your advisors to ensure that the all parties stick to a schedule. Advisors should make certain that the offers and counter-offers progress quickly.

 10. Recognize that Terms are Just as Valuable as Price
Employ the proper use of earnouts to bridge value differences.  Also, be open to methods of calculation that maximize the seller’s ability to meet your terms. Remember rule 7.

It is important to understand the process of successful M&A negotiations and to candidly share your motivation with your advisors. Motivation is the non-negotiable element for both sides of a transaction and too frequently becomes the deal killer. Most deals do not have both buyers and sellers walking away from the closing feeling like they have won. That feeling usually occurs some months later. What is important at the closing table is to feel that both parties’ needs were satisfied in a fair and equal manner. Finally, it is important to recognize the most powerful tool in successful negotiation is the tool of quality preparation.

Charles Andrews, CBI, Managing Director of The McLean Group’s Chicago, IL office and senior member of the firm’s Healthcare & Life Sciences Practice, has more than 35 years’ technology and healthcare industry experience.  Reach him at candrews@mcleanllc.com.