Canada: Strong Negotiating Principles Set the Foundation for a Deal

Last Updated: September 21 2015
Practice Guide by Duff & Phelps

Buying and selling a business can be described as a combination of three games – Sudoku (a Japanese number puzzle), chess and poker. This is because the numbers have to tally, buyers and sellers have to think strategically, and each party has to be alert for “tells” from the other side, while not revealing their own hand.

Business owners and executives often focus on the quantitative elements of value when buying or selling a business. While the numbers are important, the ability to do a deal and to realize shareholder value ultimately rests in the negotiating abilities and relative negotiating positions of the parties involved. While the negotiating strategies and tactics that are used will vary depending on the specifics of the situation, both buyers and sellers should keep the following important negotiating principles in mind:

Exhibit 1:
Principles of Negotiation

Understand the Other Party’s Motives

Many business owners and executives negotiate a deal from the perspective of trying to get what they want. However, it is just as important to understand the interests and motivations of the other party. The need and the desire of the parties to transact will dictate whether a deal can be done and on what terms. Failure to understand the other party’s motives can result in ineffective or misguided negotiations. This may delay or destroy any potential deal.

For example, a seller may need to transact due to health issues or financial constraints. Conversely, a buyer that is a public company may feel pressured to consummate a transaction in order to satisfy market expectations. In other cases, the price that is paid or received may be secondary to some other overriding issues, such as where the seller needs some assurance that their employees will continue to be employed following the transaction.

Before discussing price and terms, the buyer and the seller should focus on understanding why the other party is at the table and what they hope to accomplish. The other party may not be totally forthcoming at first, for fear of compromising their negotiating position, and/or because they may have an over-protective intermediary. It often takes time to develop a rapport with the other party such that they are prepared to express their underlying interests. It is important to listen closely and to avoid the temptation to interject when you hear something that you like or don’t like. A prolonged period of silence can be a powerful negotiating tactic because it can cause discomfort to inexperienced negotiators, thereby compelling them to fill the void by continuing to talk.

The seller should recognize that the sale of their business is a two-way street. They should be asking very specific questions in order to understand the buyer’s needs and interests. This includes questions about how the seller’s company will fit into the buyer’s operations and how the acquisition of the seller’s company will help the buyer to meet their long term goals.

Research, Research, Research

The better informed you are, the better your negotiating position. Information is the key. When negotiating a deal, the buyer has the advantage of knowing their key financial drivers, including their cost of capital and synergy expectations. The seller has better self-knowledge, as well as knowing the number and quality of different offers that have been received.

The buyer of a business should seek to understand as much as possible about the seller’s company through its due diligence process. This goes beyond the financial results, and down to the root of understanding why historical results were (or were not) achieved. The buyer should also undertake an objective assessment of the strengths and weaknesses of the seller’s business and the opportunities and threats that it faces. Where the seller operates in a different industry or different geographic area, then the buyer should also ensure that it has a sound understanding of the relevant risk factors pertaining to that industry or that geography. Where possible, the buyer should obtain data from credible third party sources (such as statistics produced by an industry body) and look for any inconsistencies between that third party information and the seller’s representations about its risks and growth prospects.

The buyer should probe the seller about the divestiture process in order to gain insight into its relative negotiating position. The buyer also should research other transactions that have taken place within the industry in the past several years, to the extent that meaningful information exists. These other transactions can provide important insights into other possible bidders and the seller’s price expectations.

The seller should research as much as possible about the buyer. This is easier to do where the buyer is a public company and regulatory filings are available. However, even where the buyer is a private company, the seller might be able to gain some insight into the buyer’s strategy through well-conceived questions and researching the Internet.

In addition, the seller should seek to obtain as much information as possible regarding other transactions the buyer has consummated in recent years, as those other transactions often can form a reference point in the negotiations.

Finally, the seller should ensure that they understand the buyer’s decision-making process. In many cases, the buyer’s negotiating representatives will not be the ones who approve the acquisition decision. Rather, those representatives will recommend the acquisition to senior management, the board of directors or an investment committee. The seller needs to know the criteria upon which the acquisition proposal will be assessed, the information that the decision makers require, and the timing of important meetings.

Know Your Alternatives

The relative negotiating position of the buyer and seller is determined by the number and quality of alternatives that they have available to them at a given point in time. An excellent book on negotiation is called Getting to Yes, by Roger Fisher and William Ury. Getting to Yes talks about a concept called BATNA, an acronym for the “best alternative to a negotiated agreement”. Simply put, BATNA states that your negotiating strength is dictated by your next best alternative.

For example, if a seller has received three offers for their business, each of which is worth about $20 million, then the seller has a strong negotiating position. If one buyer walks away, there are still two others competing for the business. However, if the seller has one offer for $20 million and the next best offer is $15 million then the seller’s negotiating position is relatively weak.

Both buyers and sellers should fully understand the alternatives that are available to them and objectively assess the pros and cons of each alternative. This is essential in order to make an informed decision as to the best course of action. For the buyer, the alternatives available might include building vs. buying, finding another acquisition target or looking to establish a joint venture rather than an outright acquisition. For the seller, the best alternative might mean selling the company to management rather than a strategic buyer, or continuing to operate the business for a period of time until market conditions improve.

Good negotiating strategy means that it is not sufficient to understand your own alternatives. Rather, the buyer and seller should try to understand the number and quality of alternatives available to the other party through means such as market research and questions about the acquisition or divestiture process, as discussed above. It is the relative negotiating position of the parties that determines negotiating strength.

Maintain Credibility

It is common for both buyers and sellers to do a fair bit of posturing during the course of negotiations. Posturing can be an effective tactic where it is used selectively, and in contrast to the party’s normal negotiating style. However, the buyer and seller must be cautious not to lose their credibility. Once credibility is lost, it is difficult to re-establish, and that party’s relative negotiating position is weakened.

For example, when selling a business, the seller usually presents the buyer with financial projections for their company. It is tempting for the seller to show optimistic projections, in an effort to get the buyer to pay a higher price. However, the seller must be cognizant that the divestiture process may take several months (or longer). At some point, the buyer may be in a position to compare actual results to a forecast that had been prepared near the beginning of the sale process. If the seller has not met their near term forecast, then their longer term forecast will lose all credibility. The shadow of underachievement can also impair the seller’s credibility in other aspects of the negotiating process.

Buyers sometimes lose credibility because they cannot obtain the financing they need (on satisfactory terms) in order to consummate a transaction. Particularly in today’s more rigid lending environment, buyers must be careful not to over-estimate how much their bank will lend them. If the buyer must turn to the seller in order to compensate for an unanticipated shortfall in financing (e.g. by paying a portion of the purchase price over time), the seller may be in a position to demand a higher price or other concessions from the buyer.

The Terms of the Deal are as Important as the Price

In most transactions, the negotiations centre on the price that will be paid. However, the terms of the deal are just as important as the stated purchase price. The terms of the deal dictate when, how and even whether the price will be paid. The terms of the deal also influence the amount of tax that is paid by the seller, or tax reduction opportunities for the buyer, which can significantly influence shareholder value.

The seller should be aware that the offer with the highest price may not represent the best deal, particularly if a significant portion of the price is in the form of a promissory note, earn-out or other form of postponed or contingent consideration. The seller must remember that any funds that are not received at the closing of the transaction represent money at risk. The seller must be satisfied that the potential payoff is worth the risk.

Where the buyer is a public company, the seller should be aware that the price and terms the buyer will offer are influenced by its own valuation multiples, and how the transaction will be treated for financial accounting purposes. Public company buyers generally are wary of consummating a transaction that is not accretive to their earnings per share in the near term. The seller can sometimes use this concept to their advantage, by structuring a deal with greater cash value in exchange for a favourable deal structure for the buyer’s financial reporting purposes.

In many cases, the buyer can bridge the seller’s price expectations gap with creative deal structuring. For example, rather than buying 100% of the shares, the buyer might purchase a controlling interest (say between 51% and 90%), with the right to acquire the remaining interest at a later date. This can allow the seller to realize their objective in terms of price per share, while reducing the buyer’s up-front financing requirements. It also keeps the seller motivated to deliver strong financial results following the transaction in order to maximize the value of the follow-on transaction.

Conclusions

Negotiations play a major role in determining the price and terms of a deal, and whether a deal can even be done. While both buyers and sellers will select the specific negotiating strategies and tactics that are warranted by the situation, each party should always adhere to the underlying principles of negotiation in order to protect and improve their relative negotiating position.

This document is not intended to create an attorney-client relationship. You should not act or rely on any information in this document without first seeking legal advice. This material is intended for general information purposes only and does not constitute legal advice. If you have any specific questions on any legal matter, you should consult a professional legal services provider.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Contact the Author?
Click here to email the Author
In Association with
In Partnership with
Other Canada Advice Centres
Competition and Antitrust
Mergers and Acquisitions
Labour and Employment
More Advice Centers
Useful Resources
CBVs are experts in their field. The following articles and papers have been written by CBVs, several articles have been featured in various national publications.
Tools
Font Size:
Translation
Channels
Mondaq on Twitter
 
Mondaq Free Registration
Gain access to Mondaq global archive of over 375,000 articles covering 200 countries with a personalised News Alert and automatic login on this device.
Mondaq News Alert (some suggested topics and region)
Select Topics
Registration (please scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions

Mondaq.com (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of www.mondaq.com

To Use Mondaq.com you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.

Disclaimer

The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.

General

Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions