Negotiating the sale of your technology company is one of the most difficult tasks you will ever undertake. It’s a situation where each side tries to obtain maximum advantage in the deal. What negotiating tactics will the buyer use and what approaches can you use to counter those tactics? We sat down with Corum Senior Vice President Steve Jones to get his insights regarding common tactics that buyers use in M&A negotiations and ways to counter them.
Sterile negotiation
Jones points out that buyers often try to pigeonhole the seller's value proposition into a narrow viewpoint that is limited to the buyer’s world. He calls this tactic "sterile negotiation". The tactic, he says, really restricts the seller's ability to highlight their true value ‒ not just as a standalone entity, but in how the combination of the seller's and buyer's businesses can create exponential value. Jones calls the upside "one plus one equals three, four, or five." As an example of sterile negotiation, Jones recalls an interchange he had with buyer who based his offer on a market index that broadly rates SaaS companies. However, that index was not appropriate for the market that the seller's company was in. It was a matter of the buyer forcing the seller's value into the buyer’s usual frame of reference, and not really seeing the broader value of the seller ‘s company.
Jones's counter to sterile negotiation is to ensure that the seller effectively communicates their true value in their messaging to buyers. He says that in representing the seller to buyers, he holds off on sharing the seller's financial data and other quantitative numbers until the buyer is first presented with the seller's true points of value. The payoff in this approach, according to Jones, is “when the buyer does get to view the performance numbers of the business, it's in the context of how we set the table.” He adds, “Otherwise, you end up negotiating with a sterile spreadsheet. And that is a no-win proposition. You lose before you get started.”
Fake alarm
Another buyer negotiating tactic that Jones highlights is what he terms the "fake alarm." This is where the buyer tries to make the case that the seller's business has too many shortcomings or challenges. Jones says buyers will come up with everything you can imagine, “all kinds of warts,” to say that they can’t pay a premium for the business. But, he adds, "We both know that they're interested." Jones counters this tactic by always selling positive, that is, by reinforcing to the buyer the qualitative value of the seller's company. He notes that it's also very important to remind a buyer that there are other buyers interested, that they're not alone. "I never end a call with the buyer, Jones says, “without reminding them why they can't live without this deal."
Exclusivity
Sometimes a buyer will attempt to lock the seller into exclusivity, where they require the seller to negotiate only with them and no others. Jones stresses that a seller cannot get backed into a corner in this way Optimal offers, he says, really come from having multiple points of interest, creating healthy tension , that is, having multiple bidders competing in an auction environment for the seller's business. This puts sellers in a stronger negotiating position. Among other things, it gives a seller's representative such as Jones the ability to counter lower offers from buyers by saying, "the market is telling us the value is higher than your current position. We’d like to work with you, but you’ll need to sharpen the pencil to move forward." Jones notes that creating auction environments for tech companies is the standard objective of Corum's M&A process. It is, he says, “our mantra.”
What can sellers do to optimize negotiation
Another key point that Jones shares with sellers regarding negotiation is to become as familiar with the buyer as possible. Previous experience is a good source. Jones has many examples of negotiating with buyers with whom he had previously sold tech companies. "When we get on the line," Jones notes, "it's not adversarial. We're both trying to get to an answer. And part of the negotiation is understanding the other side's aims and wants. If you can do that without asking, knowing before you start negotiating, that's powerful. So do the research. Leverage the experience. Know who's on the other side of the table."