Negotiating Around Risk

Steps to Selling your Business Part 34.

In a previous post, I explained that a great Advisor’s mission is to get the best deal for the seller in a form that also works for the buyer.

We face a significant hurdle in helping your buyer accept risk, and we need to minimize the impact these risks will have on the deal’s final terms and structure.

As mentioned in previous posts, your Advisors should have already done everything possible to understand the risks inherent in your business.

However, they must also fully understand the people on the other side of the table.

Francis of Assisi once wrote that it is better to understand than to be understood. I’ve seen this in action at the negotiating table; our negotiations are more effective the better we know the buyer.

Whomever you choose to work with, your M&A Advisors must be numbers experts. That is the base requirement for entry into the profession. However, at Stillwater, I’ve learned to hire number experts who are also people experts. We build our teams with negotiators who will seek to understand and empathize with buyers.

Notably, a people expert establishes rapport with buyers early in the process; this is particularly crucial when communicating your risk factors.

People sometimes get cagey around the topic, hold their cards too close to their chest, and start looking for advantages. That’s a climate antithetical to reasonable negotiation. Your Advisors should establish an open dialogue around risk analysis early. Modeling transparency, being candid, and appearing relaxed while discussing your company’s negatives actively disarms the opposing side.

That sense of openness allows us to get to know the buyers better, builds trust, and leads us to the answer to a central question:

What is the buyer’s Compelling Why?

Every buyer has one—their “Why” is the reason they feel compelled to buy your company. For a solo buyer, it’s often simple: a solid financial return on their investment. Within a larger corporate M&A scenario, the Why is usually more complex: your company somehow fits into the strategic direction of a larger whole.

Once identified, whatever the Compelling Why, we tailor our negotiations to target it.

It is most relevant when negotiating terms directly related to your risk analysis. When we know the overall Compelling Why, we can then intuit what specific parts of your risk portfolio present the most significant perceived risk to the buyer. What risks are setting off the loudest alarms? What risks most threaten the Why?

We then do two things:

1. We reposition the buyer’s perspective on risk

Remember— you know your risk analysis inside and out. There’s nothing there that you are afraid or ashamed of. Understanding the buyers means we can target their specific concerns around potential risks. We can work with them so they have a complete understanding of each of those risks and give them a framework to make an informed assessment of the economics of those risks. Doing this paves the way to “open a pathway through the sea, and a safe way over the waves” before closing.

2. We present a deal structure to satisfy the buyer’s concerns

We install unique risk-sheltering and sharing mechanisms in the deal structure to protect against specific dangers. When buyers see you owning your risk and taking care of their concerns by taking on the appropriate concessions, they always respond positively. This optimizes conditions for both parties to be equally cared for, and both buyer and seller can see that reward and risk are divided.

In the next post, I will uncover how your Advisor will work with buyers to move from a well-drafted Letter of Intent to the signing of the Purchase Agreement.

If you are planning to divest your business or have questions for one of our Advisors, don’t hesitate to get in touch with our team today.

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Written by: Douglas Nix