We all negotiate one thing or another almost on a daily basis. When you negotiate, you are trying to achieve a goal through discussion and compromise. Typically, both elements have to be present in order to arrive at a successful outcome. Therefore, you must be able to communicate and be willing to compromise.
There are ways to add power to your negotiating skills, but first we need an understanding of the elements of negotiation. Then, I’ll offer some tips and cautions.
Ask yourself this question: Can you arrive at a successful negotiation if the other person doesn’t want anything from you? The obvious answer is no. He or she will just walk away, apparently, with nothing to lose. The first element of a negotiation is that the other party must want something from you.
Listen to Ted di Stefano (7:48 minutes)
Over the years, I’ve purchased many businesses — all obviously through successful negotiations. I always kept in mind that foremost in the other party’s mind was a fair price for the company to be sold. My goal was to discover the bottom line to the seller’s price. Another key element to a negotiation is to determine the least amount that the seller will take.
For every negotiation that I entered into, I had a top figure in mind, beyond which I would not be willing to go. I figured out how much money I could come up with to close the transaction. Establishing your bottom line is another important element.
To sum up, the three key elements are (1) the other party must want something from you; (2) revealing the other party’s bottom line, and (3) determining your maximum offer.
Although the above seem rather obvious, I have seen many negotiations shattered because one element or another was ignored. However, there are additional elements that I refer to as intangibles or “soft” items that must be considered.
For example, perhaps the owner has spent so many years in the business that he/she still wants to have some part, even a small one, in the company after it’s sold. To that end, in one case I made a seller a director emeritus of a financial institution that I purchased.
He showed up at board meetings; his advice was sought; he was respected. What he couldn’t do was actually vote on any motions, but, believe it or not, this did not bother the man. He just wanted to have some input and some respect. We gave him both.
Another soft item that can greatly influence negotiations has to do with family members in the employ of the selling corporation. So often, the founder/seller wants to be sure that his/her progeny have some role in the enterprise to be sold.
What I have done in such cases was to set some boundaries as to the length of service and duties of any remaining family members. If it all worked out well, I would obviously keep the person on.
Don’t let this hurdle deter you. You needn’t be a stickler for “principle.” So long as you set the parameters, there is no reason why you can’t “inherit” some of the seller’s family employees.
Factoring in ‘Soft’ Costs
Here’s how I would get around this point. I would compute into the purchase price these so-called soft costs. I would agree to keep someone on and add the cost thereof to what I deemed was my purchase price.
If I thought that the business was worth it, even with these added benefits to family members, I would make my offer accordingly. Sometimes it works out in the long run, other times it doesn’t, but the point is that soft costs don’t have to kill your deal.
Another bit of advice is that you should enter into negotiations with the intent of trying to figure out what the seller’s needs truly are. I’ve seen cases when a deal could have closed quickly and less expensively if the buyer really knew what the seller’s needs actually were.
One can be pleasantly surprised when the seller’s special needs are openly acknowledged. They might not be as onerous as you imagined. In any event, they can be computed into the cost of acquisition. One of your goals, therefore, is to try to figure out what’s driving the seller.
This means that you’ve got to be a good listener — and a quiet questioner. The only way that you’re going to know what’s on the seller’s mind is to gently question him/her in a non-combative process that brings out the real needs of the person.
One final tip: I’ve seen negotiations abruptly stopped because the prospective buyer made an unreasonable first offer. At times, this can really offend the seller, and the seller will walk out with wounded pride or with the thought that you were not really serious about purchasing the business. So, be sure to think about the set price of your “opening volley.”
Choose Your Attorney Carefully
First of all, I want to say that a competent attorney is indispensable to the consummation of a complex business transaction. That said, not every competent attorney can bring a deal to fruition.
I’ve seen so many cases when bright attorneys felt that they should do the negotiating, they should object to certain terms, and they should control the negotiations. There are attorneys, though they may be in the minority, who feel that they must justify their fees for a transaction by being argumentative. You, the buyer, must control the discussions.
Be sure that you choose an attorney who will not aggravate the seller in any way. If a prickly hurdle pops up in the negotiations, quietly ask to be excused, and exit the room with your attorney. I’ve done that many times. You both can re-enter the negotiations united as to how much you are willing to give up in order to see the deal to fruition.
Look at the Negotiations as a Game
You’ll approach the process in a far less serious manner if you don’t go into negotiations thinking that you absolutely must have this business or die. Make it a game.
If you are totally prepared for the process, you can go into it in a very relaxed, even jovial fashion. Besides having fun, it’s very likely that you’ll end up with the business that you so much desired.
Theodore F. di Stefano is a founder and managing partner at Capital Source Partners, which provides a wide range of investment banking services to the small and medium-sized business. He is also a frequent speaker to business groups on financial and corporate governance matters. He can be contacted at [email protected].