Once our clients have given us the green light to continue discussions, we prepare a counter-proposal for each party. Before we start negotiating, we always advise our clients to keep as many parties involved in the process as possible to keep up bid tension, but also for optionality. Unfortunately we have been involved in processes where, what looks like an “over the top” bid at first has a few fatal flaws under closer scrutiny. Either the buyer hasn’t done their upfront work and lobbed in a high value with limited thought or consideration, or their bid is dependent on a financing condition (generally meaning they want to buy the business with a significant amount of debt and they need to go talk to their bankers about it).
It’s not our intention to outline all the nuances of negotiations in this blog post– there are some great, easy reads on negotiations (Getting to Yes) that we would recommend, but our intention is to outline our process. We don’t think we are giving away any trade secrets with this, but we want to give a reader a sense of flow and timing.
As part of our side-by-side analysis, we look at what structural differences there are to each proposal, what makes each bid unique and what terms (if any) are deal breakers. While our initial discussions and bid letters can provide guidance, we can’t control what the terms are of any initial proposals. But, once the initial proposal is received, we can propose back terms that are more alike across all of our counterproposals. If there is something that we like in one, we can propose it back to another. Our objective with this is really two fold. One – we want to counter with terms that are as close as possible to each bid. This is somewhat due to timing – depending on when we counter and the conversations that we have, we may have a party that “hits the bid” and accepts our counter “as is”. If that proposal were to be remarkably different than the others, we may have just left money or other terms on the table. By having terms that are comparable, we know we have closed the value gap between proposals. Second, by introducing other terms and conditions, we are signaling strength in our negotiations and that we have other proposals that we are considering. This can be subtle or in some cases, a deliberate highlight to all parties involved. Again – it depends on the deal dynamics of each situation and is a judgement call by an advisor and it works with only one party at the table, or 100. Ultimately it’s the “power of the process” that our clients hear multiple times through a process.
The other process item that we want to highlight is how we propose back terms. We make a call. We always make a call. We can’t overstate this, making a call and having a personal connection with a buyer is key to establishing trust, intent, and the framework for a deal. Lazy advisors (or ones that are concerned about a buyer reaction) will play the email game – mark up (or red line as its sometimes referred to) a proposal, email over a response and wait… and wait… and wait… with little to no context as to whether it has been read or received, let alone what the response to the proposal was. We always start with a call and start by thanking the party for their prior proposal and then we walk them through in detail our counterproposal. We want to establish our methodology for value, share our thoughts on any deferred compensation or other structuring points and talk about some of the other questions or concerns that may have arisen.
If you follow these two process steps, then you have just materially increased the likelihood of coming to an agreement on a deal and have set the foundation for a successful transaction.