Many firms use the following analogy to explain the potential benefits of negotiation. If the parties are negotiating how to split an orange, they have two options:
- Simply cut it down the middle; or
- Openly discuss what it is each party truly wants. If it turned out that one party was only really interest in the peel (e.g. to make a cake) and the other only really needed the juice, then both parties could come out of the deal better off than if a simple split down the middle had been agreed.
In a negotiation, advisors are expected to understand the full range of issues in question and the different types of solutions available in order to enable their client(s) to make an informed decision. When preparing for a negotiation, the following points should be considered:
Prepare an Agenda
Work out what the key issues are and what your client actually wants to achieve. Consider whether each point in issue is:
- One your client would "like" to win: points that are not essential and thus could be conceded in exchange for different concessions from the other side.
- One your client would "expect" to win: points your client has given you some discretion to negotiate, but would ideally not want to concede.
- One your client "must" win: points that you cannot negotiate. Such points/issues may bring the deal/negotiation to a stand still if disputed by the other side.
There are lots of different strategies firms can take.
- This approach may ensure your client secures better terms. However, it may also result in the other side taking an aggressive approach or walking away from negotiations.
Collaborative / Pragmatic
- An open, collaborative negotiation may be more efficient, effective and conducive to maintaining a positive working relationship between the parties in the future.
- Conceding on non-essential points may persuade the other side to take the same approach. However, if the other side takes an aggressive approach, a conciliatory approach may not benefit your client to the same extent.
Parties will sometimes use tactics to try and secure an advantage when setting up/undertaking a negotiation. Elements such as the following may be considered:
- Location/seating plan (e.g. which side will have the sun in their eyes).
- Silence (this can make the other party feel awkward).
- The process of exchanging information (dumping lots of documents on the other side the night before could make it difficult for them to get to grips with the issues at hand).
- Body language (showing disinterest by using your phone whilst the other side is talking may unsettle them).
However, such tactics are not necessarily conducive to a productive negotiation, as they may make the atmosphere more hostile/adversarial, which in turn could reduce any real chance of open collaboration.
Instead parties could/should try to
- Clearly define the issues
- Use lots of open questions, as this can help to find out what the other side truly cares about.
- Take breaks when necessary to cool off/confer with each other and the client.
- Build a rapport, as this may facilitate a more positive working relationship between the parties in the future.
Elements that can affect negotiation strategies
The strategy adopted can depend on the strength of bargaining power between the parties, the need to form a lasting relationship, the timeframe required and the attitude of the client.
- Consider the relative bargaining position of your client and the other side.
Time & Expense
- If you are negotiating a deal, can your client afford a long drawn-out negotiation? Does the other side have cash-flow problems that mean it needs a quick resolution? Is the other side more likely to walk away if the terms are not to their liking? If the negotiation relates to a transaction, consider whether the other party could buy from/sell to a different party if they disagree with your terms.
- Consider whether you want/need to maintain a positive working relationship with the other side in the future. If so, then a more collaborative approach to negotiation would probably be more effective.
- If the negotiation relates to a dispute, are the parties intent on keeping their affairs private? If a dispute goes to court, this may not be possible, so the parties may want to approach such negotiations in an open, collaborative manner.
Ending a Negotiation
- Summary close: you end by simply stating the agreed terms.
- Concessions close: you end by discussing the flexibility/accommodating actions of both sides.
- Adjournment close: you agree to take time out to consider more information.
- Ultimatum close: one party states that the deal either happens on certain terms or they walk away.
Points you may typically have to negotiate
- What is included in the transaction (e.g. which particular assets/the number of shares).
- Price (or the amount one party is willing to settle at in the case of a dispute).
- Time frame: for instance, the date at which payment will be made or the delivery date of an asset.
- These are conditions that must be fulfilled before full performance under a contract becomes due. Notable examples of conditions precedent include the verification (through due diligence) of all the key promises made by the seller prior to the transaction and the receipt of clearance from the relevant competition authorities.
Scope of Due Diligence
- Due Diligence refers to the process under which the buyer and its advisors carry out in-depth investigations into many aspects of proposed targets companies.
- This can involve looking through legal/financial/other records to check whether anything exists that could adversely impact upon the deal. It can help the parties to understand exactly what they are buying (the state of the target company"s finances/pension scheme/assets/employment terms/contracts etc.).
- Note that the seller will likely put restrictions in place to prevent potential buyers (which are usually competitors) from finding out too much about the seller"s business, in case the deal falls through.
- The buyer may request exclusivity over the deal so it does not waste time and money doing due diligence only to lose out to another party.
- The seller may in return request a guaranteed payment if the buyer (having been given exclusivity) walks out on the deal without good reason.
- Both parties can agree certain terms that will remain binding after the deal, in order to ensure both feel comfortable enough to go through with the deal. The below clauses are primary examples of the types of clauses that will commonly be negotiated.
- A factual statement in a contract that amounts to an assurance or a promise relating to the condition of an object or entity that the buyer is purchasing, the breach of which may give rise to a legal claim for damages.
- Buyer protection, asking for pound for pound compensation if specified scenarios take place. For instance, if the target company is in the middle of a law suit at the time it is acquired, the sellers can agree in advance to pay back any money to the buyers that the company is required to pay out in relation to the law suit. Indemnities may be subject to caps, for instance maximum amounts that will be paid out if claims are made or time limitations upon the duration for which indemnities can be relied upon.
- A promise from the seller that if the deal goes ahead, the seller will not start up a similar business and emerge as a competitor of the business being acquired. Such agreements will usually apply for a limited period of time (typically 3 years) and/or apply only to regions in which the business being acquired already operates.
- A contractual promise from a seller to a buyer not to approach and attempt to poach, for instance, certain key employees, suppliers, distributors or customers of the newly purchased company for a given time period or in a particular jurisdiction.