Posts made in October 2019

Negotiation mistakes that will kill a business sale — a case study

The Denver Post | BUSINESS

By GARY MILLER | | GEM Strategy Management

PUBLISHED: October 27, 2019 at 6:00 am

I recently witnessed a business sale that went “south” and has not closed as a result of mistakes made by the lead negotiator during the negotiation process. A transaction that was supposed to close in Q4 has been pushed back to sometime next year. Below are some of the mistakes made. The lead negotiator DID NOT:

  1. Negotiate the transaction process and deadlines before negotiating the substance of the sale. As a result, with no process deadlines in place, the buyer controlled the momentum and the pace of the transaction process from the outset. Deadlines work. They are powerful because they force action. Deadlines force people to choose either one option or the other. A deadline’s implicit threat is that lack of action has unpredictable consequences.
  2.  Obtain a signed letter of intent (LOI) after providing a comprehensive confidential information memorandum (CIM) to the buyer before he started the negotiations. Had the negotiator clearly established the need for a signed LOI before negotiations would begin, the negotiator would have known the major deal points and well-defined elements of the deal structure.
  3. Establish the price and terms of the deal initially.  By contrast, the lead negotiator allowed the buyer to “anchor” a “low-ball” purchase price and deal structure from the outset. Anchoring is an attempt to establish a reference point (the anchor) around which negotiation will revolve and will often use this reference point to make negotiation adjustments.
  4. Identify the major deal terms (deal points) that needed to be negotiated before the buyer captured control of the negotiating process and anchored the purchase price. In addition, the buyer had developed an acquisition formula that they used in previous acquisitions and made it clear that they would not deviate from most of the formula as it “had worked well” in the past.
  5. Use various negotiating techniques such as “trading off” (“I will give you this, if your give me that”) and limiting concessions without receiving something in return.  In fact, the lead negotiator did not win one deal point from the buyer. As the negotiations drug on, the buyer’s interest level waned and the closing was postponed until sometime next year, if it closes at all.

The following four steps will help prevent those mistakes listed above.

Step 1. Don’t begin negotiations until you have a signed LOI.

An LOI details the buyer’s proposal and gives the seller a first look at the major deal points including very detailed deal terms and conditions. The details of deal terms of any transaction are crucial. I much prefer a detailed LOI vs. a general Term Sheet.  Difficult or contentious issues are flushed out immediately, allowing the seller to plan his/her negotiating strategy. Typical issues are:

  • The amount and length of the escrow hold back for indemnification claims. The typical scenario for a seller is 10% or 20% for 12 months, but it can be longer;
  • The exclusive nature of the escrow hold back for breaches of the Asset Purchase Agreement;
  • The conditions to closing (a seller will want to limit these to ensure that it can actually close the transaction quickly);
  • The adjustments to the price (sellers want to avoid downward adjustment mechanisms;
  • The nature of the representations and warranties. A seller wants materiality, intellectual property, financial and liability representations, and warranties as thinned down as possible;
  • The scope and exclusions of the indemnity;
  • The provisions for termination of the acquisition agreement; and,
  • The treatment of any litigation, if any.

Step 2. Be clear about what your negotiation needs to achieve.

  •  Know the issues that absolutely must be addressed for the deal to close successfully. Some call these deal-breakers or walk-away deal points. Perhaps you have a price you’re not willing to go below. You don’t want to be unreasonable, but if you clarify limits before entering negotiations, you’ll know when to say “yes” and when to say “no”.
  • What’s being purchased. The assets of your business (an asset sale) or your business entity and all its assets and liabilities (an entity sale).
  • The purchase price, which will likely be 70-90% of the asking price.
  • How the price will be paid, including how much will be paid at closing.
  • How the price will be allocated among the IRS-defined asset classes.
  • How to address issues discovered during due diligence, whether through price concessions or actions that rectify conditions of concern.
  • How to handle the transition period, including how and when to contact customers or clients; whether employees will be rehired; how and when the sale announcement will be made; how suppliers, vendors and distributors will be notified; how work-in-progress will be completed; and, how unknown liabilities that become apparent after the sale will be addressed.
  • Your post-sale involvement with the business, including the transition period, compensation, post-sale decision authority, and a non-compete covenant.
  • How contingencies will be addressed/removed, including acceptable transfer of leases, contracts and other assets.

Step 3. Once you begin negotiating details, consider this advice:

  • Use your objectives as steering devices. If you need to concede on one point, negotiate an offsetting advantage on another point, particularly in price negotiations. If you need to settle for a lower price, your advisors can help you balance the concession by structuring the price for greater tax advantages.
  • Do not increase your asking price. You may begin to think your business is worth more than you asked, but don’t try to increase the price during negotiations.
  • Do not get complacent about protecting your interests. By this stage in the game you may almost feel in partnership with your buyer. Still, don’t let your guard down.
  • Do not issue ultimatums or seize one-sided victories. It’s safe to assume if you’ve gotten this far, you both want the deal to close. So, aim for a win-win conclusion by offsetting each of your necessary demands with a compensating buyer advantage. Work together to address the issues necessary to meet both your objectives.

Step 4. Be ready to keep negotiations moving.

Delays are deal killers — especially during the negotiation process. During negotiations you will need to call a few timeouts in order to obtain input from your advisors regarding legalities and tax implications. But, obtain the necessary information in the same day, if possible. Delays either dampen interest or heighten concern – neither of which supports the kind of healthy negotiations that lead to a victorious closing day.

Most of these “Do’s and Don’ts” are basic to the negotiating process, but in the sheer magnitude and emotion of business negotiations, even practiced M&A advisers lose sight of some obvious negotiating techniques that can lead to successful outcomes of a transaction.

Gary Miller is CEO of GEM Strategy Management Inc., a M&A consulting firm that advises small and medium sized businesses throughout the U.S. He represents business owners when selling their companies or buying companies and raising capital. He is a frequent keynote speaker at conferences and workshops on mergers and acquisitions. Reach Gary at 303.409.7740 or


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Negotiations don’t start until someone says “no”

Denver Post | BUSINESS

By GARY MILLER | | GEM Strategy Management

PUBLISHED: September 29, 2019 at 6:00 am

Countless books and articles offer advice that can help deal makers avoid missteps at the bargaining table. But some of the costliest mistakes take place before negotiators sit down to discuss the substance of the deal. Sellers fall prey to a seemingly reasonable, but ultimately a false assumption, about deal making. Sellers and their negotiators often take it for granted that if they bring a lot of value to the table and have sufficient leverage, they’ll be able to strike a great deal. While those things are certainly important, many other factors influence where each party ends up.

Three of those “other factors” can have a significant impact on the outcome of the negotiations.

Gary Miller

1. Negotiations start when someone says “no”

One of the greatest inhibitions clients have is risking rejection. This is particularly true in the post-’08 meltdown and continuing jobless recovery from the worst economic period since the Great Depression. Our reluctance to negotiate past “no” is even harder because both men and women miss the key point: Negotiation is a conversation whose goal is to reach an agreement with the buyer whose interests are not perfectly aligned with the seller.  Invite the buyer to your side of the table to figure out how both parties can get as much as each party wants as possible.

2. Negotiate process before substance

A couple of years ago, two co founders of a tech venture walked into a meeting with the CEO of a Fortune 100 company who had agreed to invest $10 million in their company. A week earlier, the parties had hammered out the investment amount and valuation, so the meeting was supposed to be celebratory more than anything else. When the cofounders entered the room, they were surprised to see a team of lawyers and bankers. The CEO was also there, but it soon became clear that he was not going to actively participate.

As soon as the cofounders sat down, the bankers on the other side started to renegotiate the deal. The $10 million investment was still on the table, but now they demanded a much lower valuation; in other words, the cofounders would have to give up significantly more equity. Their attempts to explain that an agreement had already been reached were to no avail.

What was going on? Had the co founders misunderstood the level of commitment in the previous meeting? Had they overlooked steps involved in finalizing the deal? Had the CEO intended to renege all along — or had his team convinced him that the deal could be sweetened?

Upset and confused, the co founders quickly assessed their options. Accepting the new deal would hurt financially (and psychologically), but they’d get the $10 million in needed funds. On the other hand, doing so would significantly undervalue what they brought to the table. They decided to walk out without a deal. Before they left, they emphasized their strong desire to do a deal on the initial terms and explained that this was a matter of economics. Within hours, they were on a plane, not knowing what would happen next. A few days later, the CEO called and accepted the original deal.

The gutsy move worked out for the co founders, but it would have been better not to let things go wrong in the first place. Their mistake was a common one: focusing too much on the substance of the deal and not enough on the process. Substance is the terms that make up the final agreement. Process is how you will get from where you are today to that agreement. My advice to deal makers: Negotiate process before substance.

The more clarity and commitment you have regarding the process, the less likely you are to make mistakes on substance. Negotiating process entails discussing and influencing a range of factors that will affect the outcome of the deal. Ask the buyer: How much time does your company need to close the deal? Who must be on board? What factors might slow down or speed up the process?

Of course, you can’t always get clear answers to every question at the outset—and sometimes it is premature to ask certain questions. But you should seek to clarify and reach agreement on as many process elements as possible—and as early as is appropriate—to avoid stumbling on substance later.

3. Control the frame, the psychological lens

The outcome of a negotiation depends a great deal on each side’s leverage—the better your outside options are and the more ways you have to reward or coerce the other side, the more likely you are to achieve your objectives. But the psychology of the deal can be just as important.

In my experience, the psychological lens, through which the buyers and sellers view negotiations has a significant effect on where they end up. Are the parties treating the interaction as a problem-solving exercise or as a battle to be won? Are they looking at it as a meeting of equals, or do they perceive a difference in status? Are they focused on the long term or the short term? Are concessions expected, or are they seen as signs of weakness?

Effective negotiators will seek to control or adjust the psychological lens early in the process—ideally, before the substance of the deal is even discussed. Here are two elements of the psychological lens that negotiators would be wise to consider.

a. Your alternatives versus theirs

Research and experience suggest that people who walk into a negotiation consumed by the question “what will happen to me if there is no deal?” get worse outcomes than those who focus on what would happen to the other side if there’s no deal. When you are overly concerned with your own alternatives, and especially when your outside options are weak, you think in terms of “what will it take (at a minimum) to get them to say yes?” When you make the negotiation about what happens to them if there is no deal, you shift the frame to the unique value you offer, and it becomes easier to justify why you deserve a higher price or better terms and conditions.

b. Equality versus dominance

Not so long ago I was consulting on a strategic deal in which our side was a small, early-stage company and the other was a large multinational. One of the most important things we did throughout the process—and especially at the outset—was make sure the difference in company size did not frame the negotiation. I told our team, “These folks negotiate with two kinds of companies—those they consider their equals and those they think should feel lucky just to be at the table with them. And they treat the two kinds very differently, regardless of what they bring to the table.” Over the years, I’ve seen many large organizations impose demands on their perceived inferiors that they’d never require from those they considered equals. In this negotiation, I wanted to make sure our counterpart treated us like equals.

In “The Art Of War,” Sun Tzu states that every war is won or lost before it even begins. There is truth to this sentiment in most strategic negotiations. While it would be unwise for negotiators to minimize the importance of carefully managing the substance of a deal, they should make every effort to avoid the mistakes that can occur before the buyer has formulated an offer. By paying attention to the three factors discussed here, you increase your chances of creating more-productive interactions and achieving more-profitable outcomes.

Gary Miller is CEO of GEM Strategy Management, Inc., a M&A consulting firm that advises small and medium sized businesses throughout the U.S. He represents business owners when selling their companies or buying companies and raising capital. He is a frequent keynote speaker at conferences and workshops on mergers and acquisitions. Reach Gary at 303.409.7740 or

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