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
 
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
 
Email Address
Company Name
Password
Confirm Password
Position
Mondaq Topics -- Select your Interests
 Accounting
 Anti-trust
 Commercial
 Compliance
 Consumer
 Criminal
 Employment
 Energy
 Environment
 Family
 Finance
 Government
 Healthcare
 Immigration
 Insolvency
 Insurance
 International
 IP
 Law Performance
 Law Practice
 Litigation
 Media & IT
 Privacy
 Real Estate
 Strategy
 Tax
 Technology
 Transport
 Wealth Mgt
Regions
Africa
Asia
Asia Pacific
Australasia
Canada
Caribbean
Europe
European Union
Latin America
Middle East
U.K.
United States
Worldwide Updates
Check to state you have read and
agree to our Terms and Conditions

Terms & Conditions and Privacy Statement

Mondaq.com (the Website) is owned and managed by Mondaq Ltd and as a user you are granted a non-exclusive, revocable license to access the Website under its terms and conditions of use. Your use of the Website constitutes your agreement to the following terms and conditions of use. Mondaq Ltd may terminate your use of the Website if you are in breach of these terms and conditions or if Mondaq Ltd decides to terminate your license of use for whatever reason.

Use of www.mondaq.com

You may use the Website but are required to register as a user if you wish to read the full text of the content and articles available (the Content). 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 & conditions or with the prior written consent of Mondaq Ltd. You may not use electronic or other means to extract details or information about Mondaq.com’s content, users or contributors in order to offer them any services or products which compete directly or indirectly with Mondaq Ltd’s services and products.

Disclaimer

Mondaq Ltd and/or its respective suppliers make no representations about the suitability of the information contained in the documents and related graphics published on this server for any purpose. All such documents and related graphics are provided "as is" without warranty of any kind. Mondaq Ltd and/or its respective suppliers hereby disclaim all warranties and conditions with regard to this information, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. In no event shall Mondaq Ltd 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 or performance of information available from this server.

The documents and related graphics published on this server could include technical inaccuracies or typographical errors. Changes are periodically added to the information herein. Mondaq Ltd and/or its respective suppliers may make improvements and/or changes in the product(s) and/or the program(s) described herein at any time.

Registration

Mondaq Ltd requires you to register and provide information that personally identifies you, including what sort of information you are interested in, for three primary purposes:

  • To allow you to personalize the Mondaq websites you are visiting.
  • To enable features such as password reminder, newsletter alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our information providers who provide information free for your use.

Mondaq (and its affiliate sites) do not sell or provide your details to third parties other than information providers. The reason we provide our information providers with this information is so that they can measure the response their articles are receiving and provide you with information about their products and services.

If you do not want us to provide your name and email address you may opt out by clicking here .

If you do not wish to receive any future announcements of products and services offered by Mondaq by clicking here .

Information Collection and Use

We require site users to register with Mondaq (and its affiliate sites) to view the free information on the site. We also collect information from our users at several different points on the websites: this is so that we can customise the sites according to individual usage, provide 'session-aware' functionality, and ensure that content is acquired and developed appropriately. This gives us an overall picture of our user profiles, which in turn shows to our Editorial Contributors the type of person they are reaching by posting articles on Mondaq (and its affiliate sites) – meaning more free content for registered users.

We are only able to provide the material on the Mondaq (and its affiliate sites) site free to site visitors because we can pass on information about the pages that users are viewing and the personal information users provide to us (e.g. email addresses) to reputable contributing firms such as law firms who author those pages. We do not sell or rent information to anyone else other than the authors of those pages, who may change from time to time. Should you wish us not to disclose your details to any of these parties, please tick the box above or tick the box marked "Opt out of Registration Information Disclosure" on the Your Profile page. We and our author organisations may only contact you via email or other means if you allow us to do so. Users can opt out of contact when they register on the site, or send an email to unsubscribe@mondaq.com with “no disclosure” in the subject heading

Mondaq News Alerts

In order to receive Mondaq News Alerts, users have to complete a separate registration form. This is a personalised service where users choose regions and topics of interest and we send it only to those users who have requested it. Users can stop receiving these Alerts by going to the Mondaq News Alerts page and deselecting all interest areas. In the same way users can amend their personal preferences to add or remove subject areas.

Cookies

A cookie is a small text file written to a user’s hard drive that contains an identifying user number. The cookies do not contain any personal information about users. We use the cookie so users do not have to log in every time they use the service and the cookie will automatically expire if you do not visit the Mondaq website (or its affiliate sites) for 12 months. We also use the cookie to personalise a user's experience of the site (for example to show information specific to a user's region). As the Mondaq sites are fully personalised and cookies are essential to its core technology the site will function unpredictably with browsers that do not support cookies - or where cookies are disabled (in these circumstances we advise you to attempt to locate the information you require elsewhere on the web). However if you are concerned about the presence of a Mondaq cookie on your machine you can also choose to expire the cookie immediately (remove it) by selecting the 'Log Off' menu option as the last thing you do when you use the site.

Some of our business partners may use cookies on our site (for example, advertisers). However, we have no access to or control over these cookies and we are not aware of any at present that do so.

Log Files

We use IP addresses to analyse trends, administer the site, track movement, and gather broad demographic information for aggregate use. IP addresses are not linked to personally identifiable information.

Links

This web site contains links to other sites. Please be aware that Mondaq (or its affiliate sites) are not responsible for the privacy practices of such other sites. We encourage our users to be aware when they leave our site and to read the privacy statements of these third party sites. This privacy statement applies solely to information collected by this Web site.

Surveys & Contests

From time-to-time our site requests information from users via surveys or contests. Participation in these surveys or contests is completely voluntary and the user therefore has a choice whether or not to disclose any information requested. Information requested may include contact information (such as name and delivery address), and demographic information (such as postcode, age level). Contact information will be used to notify the winners and award prizes. Survey information will be used for purposes of monitoring or improving the functionality of the site.

Mail-A-Friend

If a user elects to use our referral service for informing a friend about our site, we ask them for the friend’s name and email address. Mondaq stores this information and may contact the friend to invite them to register with Mondaq, but they will not be contacted more than once. The friend may contact Mondaq to request the removal of this information from our database.

Security

This website takes every reasonable precaution to protect our users’ information. When users submit sensitive information via the website, your information is protected using firewalls and other security technology. If you have any questions about the security at our website, you can send an email to webmaster@mondaq.com.

Correcting/Updating Personal Information

If a user’s personally identifiable information changes (such as postcode), or if a user no longer desires our service, we will endeavour to provide a way to correct, update or remove that user’s personal data provided to us. This can usually be done at the “Your Profile” page or by sending an email to EditorialAdvisor@mondaq.com.

Notification of Changes

If we decide to change our Terms & Conditions or Privacy Policy, we will post those changes on our site so our users are always aware of what information we collect, how we use it, and under what circumstances, if any, we disclose it. If at any point we decide to use personally identifiable information in a manner different from that stated at the time it was collected, we will notify users by way of an email. Users will have a choice as to whether or not we use their information in this different manner. We will use information in accordance with the privacy policy under which the information was collected.

How to contact Mondaq

You can contact us with comments or queries at enquiries@mondaq.com.

If for some reason you believe Mondaq Ltd. has not adhered to these principles, please notify us by e-mail at problems@mondaq.com and we will use commercially reasonable efforts to determine and correct the problem promptly.