M&A: Negotiating the purchase

Suppose that you’ve gone through the framework we previously outlined and you’ve put together a long-list of companies that seem interesting; what now? Perhaps unsurprisingly, I would recommend you contact an investment banker about the long-list before even picking up the phone to make a call to a potential acquisition target. Allow me to explain why.

We’ve encountered more than one CEO who has picked up the phone to make that call, only to wish they’d used an intermediary as soon as the call was over. In the case where a competitor is approached by another competitor, the first question that often comes to mind for the CEO of the target company is, “do they want to acquire us or just find out about all our secrets?” It’s a long way back, once the target firm has raised those flags.

On the other hand, when an investment banker calls the target company, and tells them that they’ve been engaged specifically to talk to them about their interest in selling, in effect, they’re selling off their personal credibility and can quite quickly establish a trust relationship with the target. Once trust has been established, the barriers are removed to have a meaningful discussion on a potential acquisition.

Investment bankers bring further value through investing heavily in information, know how to get rival knowledge, have extended networks in many industries and geographies and above all, are able to gain access; information on a deal is one thing but having the access to execute is something else. The sooner an investment banker is brought in, the better for the value of the deal for the buy-side and the sell-side.

Now that you’ve got an investment banker on board, you can begin constructing a negotiating strategy before approaching the target firm. Strategies differ on this but we believe in constructing what we call an “intelligent letter of intent.” In this letter, we try to frontend-load our intentions into the letter of intent because the more you have to negotiate at the start, the less you have to negotiate at the end.

This letter of intent can detail your thinking on reps and warranties, pricing, transaction structure and arbitration disputes, among others. Some firms use the letter as a beginning to negotiations but there are some ethical questions around this. From our point of view, ethics drive the trust, which in turn drives the negotiation process.

The face-to-face negotiation process then comes down to minor and major negotiating points. The major points come down to valuation, risk-sharing and structure. Questions arise where investment bankers show their worth to the process include, “do we need an earn-out?” and “do we need a vendor note?” and “what are the tax consequences of the sale?” Tax consequences can be a major point – for example, in some jurisdictions asset sales are taxed more punitively than share sales so in such cases, sellers are looking to net proceeds.

These are just to name some of the major points of a typical negotiation process but each deal brings its own set of issues. A lot of the negotiation is just trying to sort through what’s important. My advice to buyers is not to drive a stake in the sand too quickly. You have to look at the transaction in its entirety before you decide. Very often what’s important to the buyer is almost irrelevant to the seller and vice versa.

There’s no set timeframe for all this coming together, either. However, there’s an old French proverb which applies here: “everything that drags gets dirty.” Although time is far from the defining factor in negotiations, in our experience it’s better to work through details with some haste before either side loses interest in the details.

Finally, and most importantly, negotiating the purchase comes down to three things:

1.      Listen

2.      Build Trust

3.      100% ethics

Ensuring these three elements are present giving negotiations every chance of reaching a successful conclusion. These are the non-negotiables of the negotiation process.