5 lessons from my past negotiations
With over 40 M&A transaction processes behind me, I have had the opportunity to participate in a number of commercial negotiations. I believe the basic mindset for negotiation involves 5 key themes regardless of size or topic, even though every deal is different.
I’ve negotiated content for both sale agreements and individual employment agreements and found it remarkably similar in terms of the relationship principles that can be applied. Even at such different levels of materiality, i’ve found the mindset and thought process to prepare is basically the same. Here’s a few experiences within those 5 themes for you to apply to your own negotiations
- Know your audience
Spend a bit of time discussing what the goals of the other side of the negotiation will be in advance. Specifically, taking a look at their history of negotiations is instructive, as is their stated goals and the commercial context. As an example, the financial context they operate in — levels of return they expect, willingness to bear costs, structure of the deal they propose to use — will provide a model on what they may be willing to contemplate in this discussion. (Check out this post for a practical example.)
The second major consideration here is who is the partner of superior leverage. This power equation impacts the likelihood of success for one party or another. If you have more leverage over the other side, then you have more opportunity to direct negotiation outcomes in your favor. Leverage is created in a number of ways — having less requirement to achieve a deal than the other partner, having key assets required to achieve the value involved in the opportunity or being the only one willing and able to achieve the goal proposed at that particular time. It is a concept with its limits but important to understand as it dictates what likelihood there is of you being able to hold to your bottom line in negotiations.
Finally, leverage must be balanced with a positive intent. Ultimately a successful negotiation is about arriving at an acceptable level of mutual benefit from the arrangement and not creating a “win-lose’ arrangement. A bitter party walking away from the deal is bad for business and for your reputation. It may stop people wanting to bring you opportunities in future.
2. Determine your bottom line
To determine your bottom line, its important to understand the scope of the opportunity on offer from the deal.
- First, what is actually on offer from this negotiation
- When is value being created and how is it being split
- How enduring is your control over the value on offer
Once that is clear to you, then you need to ask what risks are there to you achieving the value you seek and what is the minimum you must achieve to be willing to sign a deal. This sine qua non can be about a price level, degree of control of the arrangement going forward, certain key aspects of working arrangements, exit provisions or ongoing compensation and reward as examples or all of the above. Overall it should add up to the opportunity to achieve your goal in a long lasting way.
3. Prioritize your goals for the purpose of trading their value with the other side
Your “bottom line” should now be set out as a list of bullet points that you will not do without. Once you have identified these key items that must be true to move ahead, then you should prioritize them.
The prioritization is done to allow you to begin to identify what is it in your lesser goals that you are willing to give up to achieve your primary goals.
The reality is that few negotiators get all they want. A seasoned negotiator typically presents their ‘key term’ wants at early stage inclusive of some areas they feel willing to give up down the road in trade for achieving the other more important goals on their priority list. A negotiation should not be explicitly adversarial up front. Instead, it needs to be constructive and collaborative to move forward. If leverage is relatively equal, then this is very important to have something to trade.
The benefit of asking for things you believe you want but are willing to give up is that it provides space to give in return for something else you receive. This is a key point - you must trade items of value for things you want and not donate value to the other side. Often a key point such as equity split or number of board seats will be your true north star, but other issues may not be so important. If you are prepared to give the other side what they want in some areas, it should not come for free or without achieving in core areas of your goals elsewhere. It is rare you get tangible benefit from the other side for giving something up as “an investment in the relationship”. There are other ways to show mutual respect and appreciation for the needs of the other party.
A second key aspect to be aware of is how you plan to phase negotiations. For most commercial deals, the key terms are outlined up front at a high level in a “term sheet” — often a couple of pages. This document is critical as it provides the boundaries of the rest of the detailed negotiation. If you give up something key here, do not expect to be able to get it back again later without some fundamental change in the context of the negotiation.
4. Agree the role you and your team members will play
I understand there are different schools of thought here on the right approach but here are a few fundamentals i have usually observed being applied.
- Who is the final decision maker on your side
Your final decision maker should not be at the negotiating table until you are ready to settle the key points or close out. You need someone who is a tie breaker and kept in reserve. In most corporate settings this exists in two forms, an executive sponsor for a deal and then a company committee who provides final ratification on the transaction terms.
2. Make a distinction between the roles within the negotiating team
For every discussion, planning who will lead on which issue, who is presented as lead and support negotiators, who focuses on one section or another should all be discussed and agreed. The role of specialists must be clearly agreed — who is the “decision maker” and who is bringing the “know how” to assess each aspect of the terms being discussed. In complex negotiations, sometimes an issue is a matter of law, policy or fact only knowable by an expert and can be steered by the advisor alone. In other situations, the matter is a ‘money issue” or a matter of risk tolerance for the ultimate decision makers. In that case, the business owner should be the decision maker. The best advisors will know when you are dealing with each type and support a business owner in being clear themselves. It is a key trait to look for in your advisory team.
3. Make use of your advisors to side bar issues
Your advisors are there to resolve some the more contentious points outside of the main negotiation. Your legal teams can often play this role. When negotiations apparently come to an impasse or conversation cannot continue constructively, the lawyers provide a second channel for exploration of the reasons for the impasse. They will explore solutions, allow dismissal of potential avenues of discussion and expedite bringing the main parties back to an agreement. (HBO’s Silicon Valley drolly demonstrated this idea in Season 2)
5. Determine how time influences your chances of success
The time available for negotiation is a critical part of your leverage equation. Time has three impacts on your process. First it informs the cost of having your negotiation team together for that period and secondly it informs the practical reality of what can be achieved in the negotiation. Last, timeliness matters. When does the deal needs to be in effect to allow the parties to achieve the desired value from the transaction? There may well be a deadline involved. Understanding how much time you have and when the outcome needs to be achieved can intensify the pressure on each side to achieve the desired goal by increasing the difficulty of the process.
As an example, you will often see the idea of a time limited “exclusivity period” being used to both incentivize a bidder to participate in a negotiation. It works in this way; For a month, the bidder has the seller’s undivided attention but if terms or satisfactory progress is not achieved by that point, the seller has the right to walk away. Time is the critical factor here. It both limits on what information the seller has to provide to get the buyer comfortable (benefit one) and also provides a milestone at which progress can be halted (benefit two). On the other hand, it creates risk the buyer cannot get comfortable fast enough and the deal falls apart.
The final thing to remember is how your prioritization plays out during discussions in context of time spent and sequencing of your discussions. Often whole sections of the detailed agreement do not really get touched until late on in the process. A typical tactic of a process is to agree “we need to aim to finish discussions by this date or the deal is off.” This forcing mechanism happens in most processes late in the game and is a key driver to focus all parties on driving decisions to conclusion. As time begins to run out, suddenly this neglected area of the agreement does not get negotiated on its own terms. Time pressure begins to drive compromises you may not enjoy later on as all seek to meet the imposed deadline.
My general advice is to not leave something you care about to later in the process, you will most likely reach terms below your bottom line in that area. it can become quite extreme in that the final day before a signing can involve all outstanding points in an agreement being aggregated and horse traded in terms of overall economic value to just get to the end of the job. In this situation, the finer points are often lost.