Two Mistakes to Avoid When Negotiating a Deal
I’ve been helping clients buy and sell businesses for over two decades now and have been involved in hundreds of negotiations. If you asked me to name, off the top of my head, two mistakes most often made by clients when negotiating a deal, here’s what I’d say they are:
1. Failing to Focus on What’s Most Important
Yes, this seems simple and maybe you’re thinking that I’m just repeating a truism, but it’s remarkable how many people try to accomplish too much, too soon, and end up with a deal that’s not as good as it could be. Negotiating a complex business transaction is oftentimes best compared to a game of “three-dimensional chess,” fraught with competing priorities, imperfect facts, messy politics, strained personal relationships, distractions, and stress, stress, stress. So much to consider, so little time, and seemingly no way to get the deal terms exactly right.
So how should you deal with this? One of my mentors and law partners, Don Rogers, answered this for me some years ago. The answer is: focus on accomplishing the two or three things that are most important, and don’t be distracted or sidetracked by secondary objectives. You may not accomplish those secondary objectives, but focusing on the primary objectives helps bring order and even simplicity to otherwise over-complex discussions and makes it more likely you’ll accomplish your primary objectives. I’ve seen this approach succeed time and again.
For example, in one recent deal, my client wanted to buy another company, the seller was willing to sell at a very favorable price, and the seller’s counsel was pressing us hard to make concessions on a dozen secondary deal points. Among other things, the seller wanted my client to change the structure of the acquisition in a way that wouldn’t be as favorable from a tax perspective; demanded that my client pay all of the transfer taxes; and insisted that neither the non-compete period, nor the duration of indemnification coverage, could last for more than one year. Had the purchase price not been so attractive, the seller’s position on these points would have been enough to make my client walk away.
In this situation, though, our focus was on two things: the low purchase price and the need for an indemnification escrow to backstop the seller’s indemnification obligation. If we could get those two things, my client could and should make concessions on the secondary points. As it turned out, she got the two big things she was looking for, avoided getting bogged down with the significant but not critical secondary objectives, and managed to reach a deal with the seller.
2. Being Afraid to Ask
You might say that I’m again indulging in clichés but I’m going to say it anyway: don’t be afraid to ask for unusual deal terms. Too often, dealmakers get stuck in the rut of what is “customary.” Now more than ever, there are surveys galore that provide statistics showing what is “typical” with respect to a particular deal point, and this backward-looking information too frequently drives future-looking behavior.
By way of example, just because a particular survey on frequently negotiated deal points shows that indemnity caps are less than 10% of transaction value in over 50% of all transactions, doesn’t mean your indemnity cap must be less than 10%. Again and again, dealmakers restrain themselves unnecessarily from asking for things that are out of the ordinary. This is often a mistake.
One of my clients had over 30 years of deal-making experience with a major public company before joining a private company to help with reshuffling its portfolio of subsidiaries. This is one guy who keeps score and is not at all afraid to ask for things that are out of the ordinary. In one recent deal, we were on the sell-side and the buyer wanted to pay part of the purchase price with a promissory note (i.e., my client, the seller, would effectively loan a portion of the purchase price that the buyer would pay back over time).
The buyer, in passing conversation with my client, referred to this loan as “mezzanine-like financing.” My client immediately picked up on that reference and negotiated a $30,000 loan fee of the type that a mezzanine lender would charge a borrower. If the buyer got this loan from a third-party mezzanine letter, it would have to pay this fee, so why shouldn’t the buyer just pay the fee to my client instead? I was both surprised and impressed by this client’s moxie in winning this point.
Are you negotiating the purchase or sale of a company, or some other complex business transaction? If so, are you focused enough on accomplishing the two or three most important objectives, even at the expense of a dozen secondary goals? And is there anything you’d like to ask for but have been afraid to raise in negotiations?
Focus on what’s important. Avoid getting hemmed in by what’s “normal.” And look for aggressive and creative ways to accomplish your primary objectives while also being willing to sacrifice secondary objectives as part of the bargain.