Our Open Forum Panelists were:
Brendan Lewis – Managing Director Flinders Pacific & Chair of the Churchill Club
Like almost everything in life, 90% of the job is in the preparation and 10% in the execution. Even if you close a deal, you are guaranteed to be leaving money on the table if you don’t do your homework.
Learn to be both strategic, understanding what your big picture is, and opportunistic, taking advantage of what pop’s up.
Determine what is fair and reasonable for you and them, then ask for a percentage more, leaving a bit on the table to negotiate with.
Its hard to negotiate for yourself, by yourself as you are emotionally attached and full of biases (whether you realise it or not). This makes you much less commercially astute.
Negotiation is like selling, get a series of yes’s. Start with small agreements, then work your way up to big agreements.
There is no such thing as a merger of equals. Everyone is different and has slightly different agendas. Its appears to work out best when there is only one MD at the end of a merger process.
Understanding what questions you will be asked should always be part of your preparation.
Understanding the other Party
We were given two ears and one mouth. Spend your time listening and make less, better targeted offers. Its easy to look like a goose, so don’t hesitate to ask people to explain if you are unsure about their position.
Emotions are important, you must understand how the other party feels about the vision for the deal, themselves and their people.
Quite regularly the motivation for the sale of a business isn’t money. All to often its things like being tired or burnt out, getting a divorce or wishing to retire but not having a viable heir. Remember that money is generally only one of the the items on the table.
You need to seek to understand the party to a negotiation. Failure due to a lack of information “Why didn’t you tell us this earlier” happens often.
Good probing questions to understand the the other party’s goals and what they are flexible with (eg price) include:
- If we went down this path, would you be interested?
- Under what circumstances would you be flexible?
Also, listen for descriptors such as “in the order of” and “at least”.
Asses the type of person you are negotiating with. Do you like them? Are they prepared to listen? Are they confident (good) or arrogant (bad). Remember that what normally starts with laughter, ends with tears.
Deciding what you want from the Deal
Be creative and have a wish list before the negotiation. Remember that you always need stuff that you are prepared to trade.
When there is no precedent, ask for everything on your wish list.
Be determined and patient, because sometimes deals take years.
Be strategic, but opportunistic as well. Eg Freeonline was given the opportunity to shut down the business, but give the investors a 40% return, so took it.
Need to understand clearly what you need as compared to what you want. Your wants can be watered down, but not your needs.
Dealing with a large party
When dealing with a large organisation, you need to first figure out what the whole deal could look like, then figure out how to test the waters. Do a small deal first and see how that plays out, before you investing your time and resources into something much bigger.
Don’t get over excited by doing a big deal, because stakeholders with the larger party can leave and the passion dies. This happens all the time so be very sceptical of large deals.
When you do a deal with big guys, if there is no guarantee on income levels, there is no motivation for them to focus on you.
The best advice is normally to sell and move on to your next venture. Its unlikely you can find a satisfying role in a large organisation that you have sold your business to.
Dealing with a difficult party
How do you deal with an Unreasonable Condition – Match it with an unreasonable demand of your own to diffuse the situation eg The Liberty Bell was cracked when delivered – 150 years later the local council demanded the warranty was honoured and the bell was repaired for free. The manufacturer then politely asked for it be returned in its original packaging, as per the warranty.
How do you deal with Shifting Sands – people that backtrack and reopen solved issues. Have negotiations rich with variables, so there is no agreement until the end. The last issue should be price, so that re-opening any issue will affect price. You can also reserve the right to reopen and agreed issue, to get past the roadblock.
How do you force decisions? – Propose solutions and ask for a response. Also, don’t be afraid to ask hard questions like “how do we speed this up”.
Dealing with an easy party
Negotiation is different from persuasion, both parties are required to be “negotiating” to get to a deal. You need to consider
Rules of thumb.
- How good a result can you get without tarnishing your reputation.
- Its foolish to think you would never meet these people again, consider this before burning them.
- Remember that credibility and reputation are the only things you take with you.
Dealing with Potential Investors
Everyone talks about Smart Money and Dumb Money, but every investor thinks they are offering smart money. Smart Money is Money that comes with mentoring, experietse, synergies and opportunities. In truth its wrth 2->3 times dumb money. A good example is the story of Cosmetics Entrpeneur Poppy King. Poppy was offered a ebtter financial deal from an investor with no strings attached, than from an inverstor with a large amount of industry experience that they would bring to the table. She chose the money without strngs attached and had closed down within 18 months.
Investors may also seek their own “smarts” to go with the deal, seeking out further investors with the right skills or attributes to add value to the venture.
Your Negotiating Team
SME’s can’t negotiate anything decent on thrir own. Large corporates have a team to support them. It is ridiculous to think that you can do better by yourself. Both old and young entreprenurs normally have a panel of mentors they can call on.
Should you get a professional to negotiate for you? Yes. Professional Negotiators will also determine your position much more accurately that you ever can, and pressure test your assertions.
Having to go back to your stakeholders is a useful technique as it gives you breathing space. Deferred authority is important “especially when a decision is demanded “I want a decision now”. Dom always makes it clear he will need to take the deal to his advisors to confirm (even when his advisors where just his sister and their accountant).
Its good to have a housekeeper on your team who records and summarises. It takes pressure off you and gives you breathing space to think. It also allows you to watch body language when difficult questions are being asked.
Your ideal team should include:
- The Negotiator
- A Summariser – who confirms understandings and records them.
- An Observer – who just listens and watches reactions, for later discussion.
- Specialists as required.
Bring lawyers in after you have come to a Heads of Agreement. The lawyers should draft the agreement to reflect the HOW. They should not drive the negotiations. Too many snouts in the trough drives the price up.
Only allow two iterations of back and forth between Lawyers on the paperwork, then meet with the other party to resolved. Lawyers hate this as they don’t get to bill as much.
Other cultures can be very difficult to negotiate with but negotiating still follows the same sequence. You cannot ignore the cultural differences and should always have cultural assistance on your team to understand the other side’s thinking and values.
There is also a dramatic difference between the commercial environments in Australia and the US, but not particularly Melbourne and Sydney.
In the US
- The market is much, much bigger.
- Investors are more generous.
- They are only interested in global solutions.
- You are expected to negotiate much, much quicker.
Australia is a terrible place to raise private equity. Richard indicated that Private Equity investments as a percentage of GDP was:
Australia = 0.6%
USA = 2.8%
Israel = 4.5%