When it comes to the most important negotiation of your life, are you prepared? Negotiating the sale of your software company is one of the most difficult tasks you will undertake. Not only will you and the buyer be in opposition on many points, from price to structure to risk and more, but you may be negotiating with your future boss! Here are some key negotiation tips from Corum's senior dealmakers drawn from their decades of deal experience.
Determine your position
Effective negotiating requires solid positioning. An important prerequisite in negotiating is determining your position long before conversations with buyers get under way. This is important for a number of reasons. First, in many situations there are multiple shareholders involved. Determining your collective position up front ensures that everyone is in alignment, enabling you to communicate with one voice, and avoiding any mixed signals that buyers could take advantage of. Second, and perhaps most important, by determining your position up front, you avoid making on-the-spot decisions that could erode your position. Having clarity regarding the endgame you are seeking is an important factor to being successful in this process.
Identify and eradicate weaknesses
Negotiating should be conducted from a position of strength. The strength of your position is enhanced by identifying your weaknesses and eradicating them. If any weaknesses are impossible to eradicate, declare them as early as possible. This removes them from being used against you ‒ something that could undermine your position and give maximum benefit to the buyer. Failing to use this approach can cause significant damage to the strength of your negotiating position. Think of it in terms of a yachtsman taking the wind out of the sail of another yachtsman at the beginning of a race. Any advantage that you gain could be the difference at the final outcome. Remember, defense is sometimes the best form of attack. Turn your weakness into strengths.
Address the most difficult issues first
Another key to successful negotiations is to identify and prioritize all the issues from the start. The most difficult issues should be addressed as early as possible. Your leverage is greatest in the early stages of the process. Use this leverage to establish your position and resolve the most pressing conflicts at the outset. You gain key benefits by addressing the most difficult issue first. If you can address the most difficult issue early, you save time and money that would have been wasted on issues further down the list. But more importantly, when you do resolve that most difficult issue, you set the stage for a much smoother resolution to lesser issues. You also learn how the buyer negotiates. Understanding the buyer's style and negotiation protocol will only strengthen your position down the line.
Use straw men
In a successful negotiation there needs to be flexibility shown on both sides. Without this flexibility it’s difficult for the opposing parties to feel like they reached a fair middle ground. One way to do this is to include “straw men” in your proposals. In other words, as part of your negotiations, put in one or more concepts that you are willing to take off the table. This will help you focus on the other conditions you feel you really need, and trade-away some of these straw men that aren’t really important to you. It will show the other party that you can be flexible and not have to have everything in your favor.
Get all issues aired simultaneously
One of the most effective negotiating ploys by buyers is serial negotiations. After a Letter of Intent (LOI) is signed, some buyers present issues individually, and you as the seller are pushed to reach a solution on each one before moving on to the next. The problem is you don't know at the beginning how many issues there will be, and which ones are actually important to you and the buyer. Your response as a seller should be to ask for all the issues to be put on the table first, so that you understand all of them together at one time. Then you can reshuffle them, making sure that you stage the issues so that the buyer can win one, and then you can win one that is important to you. Inevitably, you will be left with a few big ones to hammer out, but at least you won’t have given away too much early on.
Review the T&Cs with the buyer
After receipt of an LOI, it’s important to get on the phone with the buyer to review the T&Cs. Your initial objective is to understand the term sheet and set a positive tone for further discussions. But be careful not to imply agreement to certain buyer conditions. Even a passive or inferred suggestion that you’re O.K. with unattractive terms, or with complex and unusual frameworks, will only cause problems later. And the inverse is equally true, that is, be clear when you don’t agree with positions that seem unreasonable, and explain why. You don’t have to argue the case at this point, but it helps to put preliminary concerns on the table for further discussions when your M&A counsel is fully engaged. This approach saves backtracking, streamlines the LOI process, and sends a clear message to the buyer that you’re a competent negotiator.
Reject partnership offers
During the negotiation process, it’s often the case that a prospective buyer will try to introduce the idea of a go-to-market partnership, rather than an outright purchase. This may sound very compelling, especially if the buyer has a large sales force and a dominant position in the market. However, test marriages seldom work and the buyer is simply trying to “Get the milk without buying the cow”. It’s important that this dialogue be closed down quickly. It should be made clear that a purchase of the company is the only option on the table. Many times the buyer may be simply trying to buy time to test for market acceptance of the joint solution or to learn more about your secret sauce so they can make it themselves.
Maintain composure
Negotiations can get heated. Reactions during negotiations can be irrational. Sometimes it’s an act and sometimes it’s real. There have been cases where buyers would not agree to a point simply because they did not want to. It didn’t matter that it was immaterial to them, it was personal. No matter how frustrating the process is, remember that if you complete the deal, you are going to have to work with the other side ‒ perhaps even for years. Don’t let transaction exasperation poison your relationship with the buyer. One way to do that is use intermediaries to take the heat. For example, some sellers let their operating people drive the deal until it is time to negotiate the transaction. Then the corporate development team takes over so that the relationship with the operating people can be maintained. The corporate development team can be tough in negotiation while preserving the previous relationships. Also, take advantage of Corum's team of dealmakers. Express your frustrations to them and let them take the heat from the other side.
Be responsive
Responsiveness in the critical stages of final negotiations of an LOI is incredibly important. All requests for additional information must be handled as quickly and professionally as possible. Every opportunity to demonstrate knowledge, capability, timeliness, and professionalism in communications with the buyer has a direct and positive outcome on price and structure. Your sense of urgency automatically translates into keeping the buyer moving forward with the same purpose. This positive momentum will keep churning along to create even more positive momentum. Conversely, the opposite can also be true. So create positive momentum. Make it contagious. Have others share in the pace and share in the upside rewards of getting a job done well.
Get the right attorney
M&A law is a discipline unto itself. There are firms that dabble, and then there are the experts who understand the intricate dance between buyer and seller. Tech M&A deals are complicated, and an inexperienced attorney can kill them. This means that your company attorney is probably not the right choice. Here are some questions to ask in finding the right attorney:
• What were their last couple of deals? Do they have a track record of successful technology M&A?
• How do they approach negotiating risk? Discuss the risk-reward tradeoffs they have made in the past.
• What is the range of capabilities of the firm? Can they review the patent, tax, and other issues that may arise?
• What is the chemistry like between you and the attorney? An M&A can be an emotional experience, so make sure they’re not adding additional stress.
Also, don’t be reluctant to ask for references and do follow through. Finally, a great way to find a good lawyer is through a Corum event. Corum works with some of the top legal firms to host their tech M&A workshops globally.
Assemble an aligned M&A team
Once you receive an LOI to purchase your company, you’ll enter one of the most important phases of the M&A process. This is a point in the process when you have the most leverage. It is at this point where your M&A team must be aligned to successfully negotiate the LOI for the process to move forward. As you consider your M&A playbook, do not underestimate the importance of having an aligned team, including your banker, attorney, and accountant. Carefully assemble your M&A team with a balance of experience and pragmatism. Every word of the LOI matters, as critical issues will come up between you and the buyer during this phase that can kill your deal. An aligned M&A team is your best offense and defense to achieve an executable LOI that meets your goals and reduces your long-term risk.
Phone the buyer when needed
Completing a transaction is a complex, emotional and long process. Gridlock is commonplace, and often leads to the buyer and seller walking away with a sour taste in their mouth. Email conversations are often impersonal, can sound strident, and in certain cases can exasperate an already tense situation. You know both the seller and the buyer want to do the deal. There are just a few issues blocking completion. So, get everyone on the phone and work through the remaining problems. Hearing your voice and your intent to work through the issues will automatically dispel 90% of the tension. Just get on the phone and get it done.