At the M&A Poker Table: Do’s and Don’ts When Negotiating with Your Buyer
What is the most important factor in a transaction? Commercial advantages? Financial performance? Synergies? Price?
All of the above, of course – but also remember that people invest in people. How well you, as seller, respond to the people across the table can often be the deciding factor in a deal. It will confound some bottom line, financial-type thinkers, but I am absolutely serious about this. You have a much better chance of getting the right deal from a buyer or investor you like and respect – and vice versa.
Good advisors aim to build competition and bring more than one buyer to the table. That means multiple exploratory meetings with a range of different organizations. As you might imagine, preparing for these meetings is crucial and a lot of work goes into making things run smoothly and seemingly effortlessly. The poker metaphor is deliberate. As well as preparation and skill, there is bluff and double bluff and the stakes are obviously sky high. Here is my take on what makes a successful meeting…
This is a Sales Meeting – Treat it Like One
It is nerve-wracking meeting a buyer for the first time but try to be as open, positive and as friendly as possible. Firm handshakes and strong eye contact set the tone. When you first meet the buyer, imagine you are meeting an important client – you want to pitch them but also see if there is a good fit.
Mutual respect is key. For the buyer, this is a chance to get to know you and your business better. For you, the seller, and your advisor, this is the time to decipher the other party’s angles, strategy, objectives, and concerns. So we make notes. We listen. A deal is never done on day one and there will be plenty more meetings to explore the details. But you can establish some personal chemistry from the start.
Listen, Don’t Lecture
Business owners love to talk about their business. It’s understandable. They have often built a successful company from nothing and are proud of what they have achieved. But when meeting buyers, this can tip over into a kind of over-excited stream of consciousness. At points in the meeting, you will be itching to correct some perceived misunderstanding, add a new opinion, or disappear down dark rabbit holes of technical detail. Don’t.
Knowing when to restrain yourself from speaking is vital. Ask open questions and give your potential buyer the time and respect to answer them in full. You may even be privy to information of see-you, raise-you significance. Store it up and use it later in negotiations. “But didn’t you tell us the exact opposite when we first met…?”
Set an Agenda and Stick to the Message
As with any meeting, an agenda is vital to ensure discussions don’t run off track. In the first meeting, you and your buyer are essentially presenting to each other. Your buyer will be interrogating some of the key messaging gleaned from your “sales brochure” – the Corporate Information Memorandum (CIM).
Second or third meetings with this and other buyers will typically be more technical, explore key discussion points and involve clearer analysis on commercial, financial, legal and operational issues. Questioning will be more granular and your buy-side counterparts may even be different with the inclusion of a CEO and other C-Suite Executives, or more narrowly focused with HR, Production, Business Development and other professionals offering their own new questions and new angles.
You must prepare for the expected and the unexpected. In addition to being able to recite a compelling narrative, you should know your company inside and out. Familiarity with figures, metrics and other company specific details impact your credibility and the buyer’s continued interest.
Again, it’s key to have a set agenda, shared with all parties. A good advisor will establish the topics under discussion long before the coffee is poured. Advisor and client should agree on all messaging and key points in advance and run coaching sessions that include tough questioning. At our firm, Northern Edge, we play devil’s advocate and role play with our clients: anticipate the really difficult questions and advise on how to answer them. Nobody should wing it no matter how experienced we think we are. I once spent 2 hours prepping with the former Chief Executive Officer of ABB-Combustion Engineering Nuclear Power and top nuclear official in the Reagan Administration just in order to prepare for a five-minute, “quick question” call with the CEO of Constellation Energy. That is a lot of preparation, but you never know where things will go.
We answer the question of why buy and why buy for more than the numbers on a spreadsheet. How do we sell the future opportunity as opposed to just the past? How do we direct the conversation to what the company will look like under new ownership as opposed to your ownership? As our client Bart Garvin of Garvin Industries in Chicago put it in reflecting on his experience, “…the single most important thing is to cast a vision of greatness for your company and make it concrete, make it tangible … People like stories … they invest in the future ….”
Buyers (Typically) Aren’t the Big Bad Wolf
First-time sellers often imagine their buyer to be a hardball player – a ruthless, hyper-critical, cold-blooded negotiator. This is a misconception. While inexperienced buyers may go into meetings seemingly on the attack, more experienced serial acquirers are typically polite, professional and in sales mode themselves. They want to impress you as much as you want to impress them.
Frequently, buyers will kick off a meeting by openly and genuinely congratulating the seller. They’ll shake their hand and tell them what a great business they’ve built. It creates a warmer, more open atmosphere conducive to discussion. But don’t fall in love too soon. This could be the classic “feedback sandwich” – buttering you up for more difficult questioning to come.
No I in Team
Typically, a buyer wants to speak to you, face-to-face, not through your advisor. These meetings are not an act of ventriloquism and you will need to do a lot of the talking. You should know your firm inside out, after all. However, a common seller error is to emphasize – or indeed overstate – your own importance to the business.
Unless you want to stay on long-term post sale, you need to make yourself sound reasonably inconsequential if not irrelevant to the company. Certainly do not paint your own starring role in its future. So say “we” instead of “I” – give credit to the team around you. Indeed, your management team and other key personnel such as a main sales person controlling key accounts, may be crucial to the acquirer; your buyer may want to meet your senior employees as part of negotiations later down the line. Before that notion gives you heart palpitations, thorough discussions on all confidentiality issues should occur early in the process including the risks and rewards of making certain key employees available to buyers later in the process, and the related issue of ensuring any such individuals behave in a manner that is conducive to a successful outcome for you and the company.
If they are included, you must let them speak for themselves. We recently had a client who just couldn’t stay quiet. When the buyer asked his General Manager some operational questions, he kept interrupting, correcting and expanding on his points. What kind of impression do you think that made?
Calls, Tells and Emotions
You care about this deal deeply – of course you do. As in the example above, it is sometimes hard for an advisor to control a passionate, excitable client. But there are often some pre-agreed calls and tells between seller and advisor to ensure that you stay on message. This can range from the subtle – a pen tap on the table, a codeword – to the blindingly obvious such as closing your notebook and calling for a half hour break.
Your body language is telling. You’ve got to keep emotion – any kind of emotion – out of the deal room. You want awkward? I’ve seen clients crying, shouting, acting snappy, sitting with their arms folded and answering rudely in monosyllables, totally disregarding all our preparation. It is hugely damaging for them and utterly frustrating for us. That’s when the notebook gets closed and the meeting ends at least temporarily until we have a chance to regroup.
There Are No Good Surprises
First-time sellers are often conscious of a perceived weakness in their business. I have lost count of the times a client has said, “Can we just not mention that? Does the buyer really need to know?” The answer is yes, they do – and whatever you are trying to hide, internal or external, recent or historical, it will come out eventually. Skeletons don’t stay buried.
The solution is to tackle the objections directly and openly. Buyers are risk averse. So give them comfort around the scale of the risk, with context and commentary. Demonstrate reasons, suggest solutions. Be transparent. And here’s the thing: being straight down the line is a pretty powerful negotiation tactic. Trust is a great selling point.
A key strategy with a potential weakness or bad news topic is for us to get there first; if we can deliver the news and message before the buyers discover it for themselves, we can frame it in the best way possible. If the buyer uncovers an issue further down the line, trust will be eroded because we weren’t open with them and we won’t necessarily have our counter arguments prepared.
Different Buyers, Different Tactics
Different buyer types have different needs and you should tailor your approach to them accordingly. I am generalizing, of course, but a private equity group or financial buyer will typically be detail focused, punchier in negotiation, make quick decisions and, perhaps surprisingly, go on what may appear to be a gut feeling (as long as the financials stack up). A corporate M&A team, from a large strategic acquirer, may be more process-focused. They may need to escalate to other decision-makers, “sell” the acquisition to their board, or toe the line on corporate governance. If so, you will have to show some patience.
The owner/manager buyer – probably the most entrepreneurial and closest in personality to you – is typically much more driven by the emotion behind the decision. It’s a big call. He or she could be investing their kids’ inheritance in buying your business and so that personal chemistry becomes a major factor. They’ll look at you and think: “Do I really want to make this person a millionaire?”
Hopefully, if you are looking to sell, you have a great business and a great story to tell, underpinned by evidence, analysis, information and vision for the future. But don’t underestimate the soft stuff. Buyers don’t just buy a business off the back of a bunch of documents, however informative they are.
When it comes to an M&A transaction, it’s not just the cards you hold. It’s how you play the hand.