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George Spilka and Associates
Investment Bankers & Acquisition Consultants

“Selling Your Company –
Successful Negotiating Strategies and Techniques”

Acquisition negotiations are confrontational by their nature. In the most fundamental sense, negotiations are a test of wills and a battle for control between two parties with completely opposing interests. If you are an owner or a CEO of a middle market company, defined as a company with a transaction price between $2-$250 million, you must accept the extremely confrontational nature of the negotiating process. You must feel comfortable in this type of environment or you are doomed to failure.

This article will discuss various negotiating strategies and techniques, which, if followed, should make a negotiator successful. The article is broken into the following 6 sections:

1. Assert your dominance.
2. Reps, warranties and indemnification issues.
3. Letter of Intent (LOI) issues.
4. Know your adversary.
5. Obtain drafting rights to the Definitive Purchase Agreement
6. Focus on winning the war, not the individual battles.

1. Assert Your Dominance – You want to convey to the acquirer that your objectives and will are going to prevail on the substantive issues during the acquisition process. This dominance should be established early in the process, as it is far easier to establish dominance at the outset, than it is to retake it from a dominant acquirer.

My philosophy is that one side is “basically the boss” in all negotiations. This means that on substantive issues, you want the acquirer to feel that he must concede to you, or risk losing the deal. Obviously, this is not easy for a middle market seller, as the acquirer will likely be much larger than the seller. Furthermore, the acquirer is used to prevailing in these matters. Correspondingly, you need an experienced, aggressive, determined negotiator to bend an acquirer’s will and force him to “play your game”. This type of negotiator will convince an acquirer that these negotiations will be different from those with which he is familiar.

2. Reps, Warranties and Indemnification Issues – Although this subject is too complex and covers too many legal and investment banking considerations to cover in detail here, there are a number of points that you should be aware of. Fundamentally, acquirers are used to a rep, warranty and covenant package (the “reps”) that basically encompasses a “my watch, your watch” concept. This approach says that anything that happened while the seller owned the company is the seller’s responsibility, regardless of when the issue manifests itself. And any issue that occurs while the acquirer owns the company is its problem. The fundamental flaw with this concept is that one of the major reasons owners sell their company is to escape the risk inherent in the equity ownership position. Under the “my watch, your watch” concept, a selling owner is still potentially responsible for all of his company’s pre-closing actions during the post-closing indemnification period, even if the issue had not matured or was not known to him at the time of the closing. Conversely, when the seller’s advisor developed a value for the company, it was based on factors known at the time. If issues positively affecting value had occurred, but were not yet known, they would not have been factored into the expected transaction price. So even though these positive factors matured under the “watch” of the seller, he will not get a post-closing price adjustment for their impact on the company’s true value. Since the seller doesn’t get the benefit from any unknown positive factors, he shouldn’t get the downside risk of any unknown negative factors. Unfortunately, the “my watch, your watch” concept is the norm. Most advisors and attorneys accept it as the way a deal should be structured. I don’t. I think that the majority of the seller’s reps should be limited to some form of “knowledge”, except for a few reps where absolute guarantees should and can be given an acquirer. Basically, the knowledge qualifier will limit a seller’s exposure to those things he is aware of. That is what he should expect, and that is what’s fair. Though this position is not customary, it can be sustained if you have considerable negotiating skill on your side.

Your indemnification exposure for violation of the reps will be on the personal level, and therefore not limited by the protection of the corporate veil. It is conceivable that violations of the reps could cause a seller a loss that exceeds the sale price. This exposure is usually limited by placing a ceiling on the seller’s indemnifications. The ceiling will vary depending on the deal environment at that time and the unique characteristics of each company, however the ceiling for the seller’s exposure should not exceed 15-35% of the total deal price.

3. Letter of Intent (LOI) Issues – All acquirers should be brought together simultaneously to leverage one buyer against the other to achieve the maximum selling price and deal terms before the execution of the LOI. At this stage of the process, most investment bankers select the company with whom to negotiate a Definitive Purchase Agreement. Their decision is usually based on only the level of the acquirer’s price and the composition of the deal consideration. I believe other factors should also be evaluated before making this decision. Prior to selecting the acquirer to enter into a LOI, all the prospective acquirers’ philosophies and general positions regarding the reps and indemnifications should be discussed, as the seller’s exposure in these areas can be more important than the deal price itself, in certain cases. Therefore, the reps and indemnifications should be a significant factor in selecting the company to negotiate with.

The LOI provides for an exclusivity period to negotiate a deal with the selected acquirer for a specified time period, usually 45-90 days. During this exclusivity period, the seller can neither solicit nor have conversations with any other prospective acquirer. Although most investment bankers don’t require this, my Firm requires our client’s exclusivity period be terminable at their sole discretion if the selected acquirer asks for a price reduction or a change in the composition of the transaction consideration. This is essential to protect a seller’s legitimate interests.

4. Know Your Adversary – A successful negotiator will know the personal and team goals of all members of the acquirer’s negotiating team. This includes the principals, investment bankers and legal counsel. Not only must you know the team goals, you must determine if any of the members’ personal goals are in conflict with the team goals. They often are. You also must become familiar with the style and determine the negotiating strategy of the acquirer. Armed with this knowledge, a negotiator should be able to develop his negotiating battle plan. An experienced negotiator knows his adversary so thoroughly that he knows how they will react to his every move, such that he will have already determined the countermove to combat the acquirer’s reaction to his initial move. This ability to stay one or two steps ahead on all negotiating issues will help assure his eventual success.

5. Obtain the Drafting Rights to the Definitive Purchase Agreement (DPA). The drafting rights to the DPA are extremely important. A seller’s ability to obtain control of these rights is critical to his eventual success. If he doesn’t, it assures that he will be getting the acquirer’s canned acquisition documents, which are likely to be structured unreasonably in the acquirer’s favor. This means the seller will have to expend considerable negotiating capital to just get back to a fair starting point to negotiate a reasonable DPA.

After a seller obtains the drafting rights, it is in his best interests to prepare a reasonably fair first draft of the agreement. A seller never wants to make excessive demands that he is unlikely to obtain. He will be able to realize a much more favorable deal by developing a negotiating pattern of sustaining his major positions. Correspondingly, the seller’s starting position should not permit significant concessions, if he is to obtain an acceptable deal. This negotiating approach will allow the acquirer to know that you are reasonable but have minimum flexibility after you define your position. You want to get the acquirer used to conceding the major points that you demand.

6. Focus on “Winning the War, Not the Battle” – This requires you to have a clear definition of what victory is in this negotiating war. Therefore, it is essential that the seller clearly defines his pricing objectives, his desired deal structure, the composition of the transaction consideration and the acceptable level of exposure in the reps and related indemnifications, before the negotiating process starts. If the seller remains completely focused on these goals, he can make any concessions that the acquirer requests, which do not prevent him from sustaining the basic positions needed to “win the war”. However my negotiating philosophy dictates that an acquirer not be given any substantive concessions, unless a comparable concession is received in return. Correspondingly, a seller should be willing to concede non-essential issues in return for concessions that facilitate the achievement of his overall acquisition goals.

Summary – Negotiations are an art not a science. They are the most critical part of the acquisition process. In fact, they are the very essence of acquisitions. Negotiations will determine if a sale is a success or failure. The way to assure your success in the negotiating process is to follow the strategies and techniques discussed in this article and to make sure that your lead negotiator is an experienced, knowledgeable and aggressive veteran of the negotiating wars.


George Spilka and Associates

Email: spilka@georgespilka.com

Phone: 412.486.8189