Years ago, attorney Neal Millard was helping one of his clients seal a deal with a famous Italian fashion designer when a curtain in the conference room suddenly opened.
In front of him were several naked fashion models.
“She must have seen the sweat pouring from my head,” Millard said of his client. But Millard, a partner at White & Case, knew that the fashion designer wanted “to get our attention diverted.” “He figured, ‘They are Americans and not used to that.’ He probably saw our jaws drop.”
Such a strategy is highly unconventional, even in L.A. But lawyers, investors, bankers and others involved in conducting multi-million dollar transactions acknowledge at least this much: there are few hard and fast rules in the world of deal making.
“Clearly, there is an art to how deals are negotiated and how prices get agreed to and how you get creative in structuring things when to bend and not to bend,” said Robert Bergmann, managing director of Centre Partners Management, a private investment firm. “You push and pull those different knobs to the extent you can.”
Negotiation 101
Most everyone agrees that the cardinal rule is to try to get the other side to make the first offer.
“You do not want to negotiate against yourself,” is how Los Angeles investment banker Howard Liberson puts it. “That means you don’t want to put something out there you could have gotten better on.”
For inexperienced bargainers, that one miscue can cost millions. “Suppose we think (a deal is worth) $100 million and we say $100 million, and the buyer thinks $120 million. We just lost $20 million if we throw out the price first,” said Liberson, an assistant vice president of Greif & Co.
There is a corollary mistake of bluffing or establishing some of sort of minimum demand for an asset to simply try to boost the price.
“I’ve seen people take a real tough approach, be very uncompromising, threaten to walk out, banging the table,” said Millard. “I don’t see that as effective.”
Another ineffective tactic is drawing lines in the sand. “Once they cross over the line in the sand, then you realize their position is phony,” he said. “The most effective negotiator is the one who says this is as far as we go. If they stick to that, at least you know.”
Most deals start with initial, face-to-face meeting during which each sides feels the other out, trying to get a sense of motivations and needs with little talk about specific numbers. It may then be followed up with an informal dinner or lunch.
The key is to ask lots of questions: Why do they want to sell? Are they retiring? Or are they diversifying their portfolio?
“Try very hard to listen to their concerns,” said Michel Glouchevitch, a partner at Riordan Lewis & Haden, a private equity firm. “This is something I learned from Dick Riordan when I worked here many years ago. Dick was good at seeing problems from all perspectives. Everyone in a tense situation looks at a problem from their own vantage point.”
Executives differ on how to get to an initial number, but in many cases a deal is initiated with a bidding process in which prospective buyers have already thrown out a figure. Others say whatever number is thrown out first may not be as important as who makes the first concession, which can devalue a deal down the line.
Indeed, negotiations are often more about concessions than demands. In deals that are ultimately successful, both sides go into bargaining with the expectation of ultimately giving something up. The key is for each party to know early on what that something is as well as having a sense of what is and is not truly negotiable.
“You have to establish your credibility at the beginning of negotiations,” said Millard, who teaches negotiation practices at the University of Southern California’s Marshall School of Business. “You need to be honest.”
Technological changes
One problem with bluffing: online research tools have allowed many businesspeople, even those who have never sold or bought a business, to become old hands pretty quickly by gathering market numbers and other data.
“These days, it’s driven by the mechanics and numbers of the deal,” Millard said. “In the old days, you got a real estate tycoon who had a feel for a property. Today, there’s too many ways to calculate internal rates of return, contingencies and alternatives.”
Technology has changed the way people conduct due diligence, the next step following the initial meetings. In many cases, the two sides create an online “due diligence room” where contracts, leases and other critical documents are posted and accessible to everyone with a special password.
Then there are the many e-mails that are exchanged during the negotiation process, which often cut negotiating times by half. These days, many deals require only a handful of one-on-one meetings.
“In the past, you prepared the contract, put it in FedEx, which took a day or two, the other side would look at it, and you’d ping-pong it back and forth,” said attorney John Mendez, a finance partner at Latham & Watkins LLP. “With e-mail, you have instantaneous delivery of documents.”
But e-mails have their limits. Most are short, intended to clarify or describe a document or just set up the time of the next meeting. Negotiating something like compensation or large differences in dollars typically does not get done by e-mail. It’s at least necessary to pick up the phone.
Glouchevitch said he once received e-mailed lease documents that included too many restrictions on a building’s use.
“When I picked up the phone and talked to the lead person on the other side representing the landlord, we were able to iron out most of those issues by talking through their intent in the restrictive language and our goals,” he said. “Otherwise, we would have bounced documents around for days before we would have come to terms.”
Emotional entrepreneurs
Once due diligence is over, there often are only a few issues remaining, although they are the kind of issues that can be deal-breakers. The key: stay calm and leave the most sensitive issues to be hashed out over a leisurely gathering, such as a meal.
“We’ve spent a lot of times outside the office with our management partners at lunches, dinners, breakfasts,” Bergmann said. “Often, you’re less tense and less stressed about having it in a social setting.”
Deal-makers generally are split on whether to bring up potential roadblocks early on or once the groundwork for an agreement has been worked out.
Most last minute issues typically have little material impact. These can touch on tax questions, perhaps landlord-tenant provisions or employee benefits.
“All these issues that seem so important in the last couple of hours almost invariably you never think of again,” said Bergmann. “You’ll have emotional sellers and you’ll have sellers who are just the guys who will try to get every last penny up to the ink about to be signed.”
Entrepreneurs cashing out of family-owned businesses are typically the most emotional because they have difficulty parting with their creation. They may ask for deal concessions or perks that make little rational sense.
Millard said one of his first deals involved an owner of a company who would not sign until she got a car out of the multi-million dollar deal, despite the sale being worth enough to buy her a bunch of pricey sports cars several times over.
“She felt she deserved a car,” he said. “The car was a drop in the bucket, but she argued vehemently. She wasn’t focusing on the bottom line.”
The solution? A buyer might be faced with finding a member of the board or management to talk some sense into the entrepreneur.
“Real estate agents always tell you ‘Don’t be here when your buyer is coming through with the inspection,’ because he will say the faucet leaks,” Mendez said. “It’s a similar thing with the entrepreneur selling a business.
This is his baby, he built this company from the ground up and he wants to know the seller will view it the same way.”
Then there’s the possibility of trade-offs, such as non-compete clauses that can be thrown in to tweak the number up or down. But still, deals can break down, often over potential revenue growth or a growing suspicion that a management team is not as strong as first appeared. In the end, sometimes the best strategy is to simply walk away if both sides are more than 10 percent apart on a final figure.
Millard has one last of bit of wisdom: schedule the last meeting at the other side’s conference room. Otherwise, “If you get mad at the other side, you can’t stomp out of your own office.”
