Mission Statement

The Sale Process

Exit Strategy and Sale Price Maximization Planning

Partial List of Completed Transactions

Partial Client List

Former Clients Speak

Former Adversaries Speak

President's Profile

Published Articles

Contact Us


George Spilka and Associates
Investment Bankers & Acquisition Consultants

Negotiating An Acquisition - 9 Key Points That Assure Success

There are many types of negotiations; all are unique. A skilled negotiator in one setting will not necessarily be expert in others. This is generally due to a lack of familiarity with the subtle complexities involved in that specific type of negotiation, which might be outside the scope of their experience. For a moment, reflect on the differences in the four following types of negotiations: an acquisition transaction, a union contract, an athlete's contract and the determination of the selling price in a supply contract between a customer and vendor where the two have a continuing relationship. You probably deduced that these four negotiations are as different as night and day. The differences include the prior relationship between the parties, the necessity for the continuity of a relationship after the completion of the negotiation, the degree of interdependence between the parties, and the replaceability of a party in the case of deadlocked negotiations. However the most significant difference is the variables and factors that the parties use to generate leverage over each other.

Acquisition negotiations are unique for several reasons, including:

A. It is a one-time contest between the parties.
B. Generally, there is disproportional strength and power possessed by the parties, as the acquirer is usually much larger and has considerably more clout in the marketplace.
C. The acquirer is usually much more familiar with the acquisition process.

Obviously, this makes it mandatory for a selling owner to find a way to level the playing field.
Negotiating an acquisition is an art not a science. It is the art of exerting pressure on one's adversary through maximum utilization of all available leverage points. Negotiations are a test of wills and the ability of one person (company) to superimpose their will on another. The following nine critical points can enable a selling owner to level the playing field and achieve ultimate success in negotiations.

1. Do Not Avoid Confrontation

Negotiations are confrontational by their very nature. It is absolutely essential that a selling owner recognize this and not attempt to avoid necessary confrontation. However he (she) should never be the one that instigates it either. The successful negotiator conveys that their will is going to prevail without demeaning their adversary. He should be demanding and controlling, but in a positive way. Unfortunately, confrontation is usually provoked because large acquirers usually demand more than they have a reasonable right to expect. However if you are knowledgeable about your situation, realistic in your expectations and stand your ground; you should be able to sustain your position. Acquirers will usually resent your strength, however they will respect you for defending your position.

2. Know Your Goal And Always Pursue It

You must stay focused on achieving the primary objective(s) of your negotiating strategy. Don't become obsessed with secondary issues. Many a negotiator has failed because they became obsessed with winning a specific battle. To achieve the ultimate success, you must remain single-minded in purpose to achieve your primary goal. Rarely is a war won where one side wins all the battles. You want to win the war. My Firm has an unwritten rule that we never make an unjustified price concession after a transaction price has been established at the letter of intent stage. However in a deal for a West Coast electrical supplies distributor, the acquirer demanded an unjustified price reduction after the Letter of Intent had been executed. No substantive reason was given. The selling company had many vulnerabilities that had been camouflaged from the marketplace. In addition, the acquirer's original price was considerably in excess of the expected transaction price. No other acquirer had made an offer that even equaled market value. Correspondingly, and in violation of my basic principle, the price reduction was grudgingly accepted as the reduced price was still 4% over the expected transaction price. Although the selling owner lost the battle, he won the war as the transaction price was in excess of market value.

Determination Of The Expected Transaction Price; The Impact Of Your Credibility And Patience On Obtaining This Price


You must know the future potential that your Company provides an acquirer and the future vulnerabilities of your business niche. You should be aware of all major issues impacting the acquisition. You must understand how the business foundation, the major issues, and your Company's future translates to an aggressive, premium market price. You must be able to intelligently answer the acquirer's questions about your Company and its future prospects. The ability to do this will portray your total command of the situation and will establish credibility with the acquirer. This should enable you to obtain the control necessary to sustain the maximum acquisition price.

Before entering negotiations, define a realistic but aggressive expected transaction price. An acceptable bottom line price should also be determined. After these have been established, an asking price can be set. Prudent strategy provides for a reasonable level of movement between the asking price and expected transaction price, so that your ultimate objective can be obtained without demeaning the opposing negotiator by making him feel like he is being bludgeoned. Once your pricing expectations have been established, a deal should not be transacted until this price is obtained. If the deal does not evolve as quickly as you like, be patient. In certain situations, deals only happen when they are ready to happen and acquirers only move when they are ready to move.

A few years ago I sold a Southwestern truck parts distributor. The transaction was not consummated for 2 1/4 years. However when the deal was done, the selling owner received a fully-priced, all-cash deal with minimal exposure to post-closing liabilities. Obviously, this was the time when conditions were present for our expectations to be satisfied.

Obtain And Maintain Control


From the first meeting, both parties are trying to obtain control and dominance of the negotiations. The establishment of control will accrue to the party that has mastered the complex psychological factors underlying the negotiation of an acquisition. The party that initially establishes control gets momentum. Once this occurs, the controlling party is generally able to obtain the majority of concessions, and usually the most important ones. In addition, once a party gets control, it is extremely difficult to reverse the roles.

Utilize Leverage From Multiple Acquirers


Do not provide an acquirer an exclusive look. Your objective is to obtain offers from all potential acquirers as close together as possible. The leverage from these competing multiple offers could put you in the "drivers seat". It might precipitate a bidding contest that produces a price in excess of the expected transaction price. Recently, my Firm represented a machine tool manufacturer. The offer of a major strategic player, which satisfied our expected transaction price, was selected from many competing offers. As we were in final negotiations on a Letter of Intent, one of the losing bidders reinstituted contact. I told them to make an offer within 24 hours that I couldn't refuse. Subsequently, they offered a price that was 15% in excess of the expected transaction price. Only the participation of multiple acquirers with acceptable offers enabled the realization of this transaction price.

Control All Acquirer Contacts With Vendors, Customers And Employees


No such contacts should be instituted until after a letter of intent has been signed. In fact, to the extent that you can reasonably limit the contact between the acquirer and these parties at any time, it will be helpful in minimizing the disruption to your Company. However if an acquirer feels these meetings are essential, you should attempt to be present at all meetings. Unless your presence in a particular meeting could reasonably be construed as an attempt to restrict the free flow of information, make it your business to be there. When an acquirer wants to meet these parties, ascertain what they are trying to learn. You should then adequately prepare these parties for the meeting. This does not mean that you are trying to "stage manage" the meeting. Instead, it reflects your intention to preclude any parties not thoroughly familiar with all aspects of your operation from providing erroneous or misleading information.

Know Your Adversary


Obtain all the information that you can about the acquirer, its results, and their outside advisors and key executives involved in the deal. Also attempt to determine the acquirer's deal motives and strategic needs that can be satisfied by the acquisition. An assessment should be made of the personalities of all participants on the acquirer's negotiating team. You should try to determine the motivating factors of these participants - both their personal and group goals. Unfortunately, the participants often have different personal objectives than the acquirer's group goal. If you are unaware of the participant's self-interests, their actions might surprise you and possibly derail a deal. Therefore the definition of the participant's personal goals is of critical importance to a selling owner. You can then develop a negotiating strategy that enables you to defuse the impact of personal goals that conflict with group goals, thereby substantially increasing your likelihood of success.

In a recent deal that my Firm consummated for a PVF distributor, I determined after the initial meeting that the acquirer had a desperate need to obtain my client's #1 market position in their trading territory. I sensed they wanted it so badly that almost anything could be obtained. Consequently, I was able to extract a price that was 9% in excess of our expected transaction price. In addition, the reps and warranties were so lenient, providing my client with absolutely no post-closing exposure, that the acquirer's attorney said as the Definitive Purchase Agreement was being negotiated, "we don't do deals like that". I suggested to the acquirer's Senior V.P. handling the transaction, that he clarify our deal for his counsel. The Senior VP responded by saying, "those are the terms I acceded to or I would have lost the deal". Only by knowing my adversary was I able to sense that a price and deal terms, which otherwise would have been unrealistic to expect, could be obtained.

Do Not Divulge Unrelated Or Unnecessary Information


Do not allow your ego to get out-of-control. Stick to the basic facts about your Company that are of interest to the acquirer. Do not unnecessarily stress your personal accomplishments and interests or discuss your specific plans after the deal. It is a mistake to exaggerate or emphasize your importance to the Company. Remember, even if you are going to work with the acquirer for a period of time, the acquirer is most concerned about how profitable the Company will be after you leave. Consequently, stick to the specific attributes of your Company, its products, its market position and any other relevant information that the acquirer wants to know. Many novices unnecessarily derail deals by the disclosure of a seemingly insignificant fact.

Be Straightforward - No Game-Playing


A direct and straightforward negotiating approach is most likely to result in successfully consummating a deal. It will facilitate the development of trust and respect amongst the parties. In fact, this candid way of approaching a deal exudes the strength that you want to convey. Game-playing during negotiations does not generally produce successful results. It tends to be counterproductive. Games are self-perpetuating and usually expand to permeate all aspects of negotiations. They further complicate an already complex situation. The avoidance of games will significantly increase your chances for success.

In these times when business is increasingly being conducted on a global basis, it is likely that the acquirer will be a large national or multinational company. The adherence to these nine key negotiating points will level the playing field for a selling middle market owner. His (her) familiarity with the intricacies of the negotiating process and their ability to expertly execute these points will determine the likelihood of achieving success.


George Spilka and Associates

Email: spilka@georgespilka.com

Phone: 412.486.8189