By Michael L. Evans and Sam R. Johnson
Merger and acquisitions are expected to be the top business headline in 2014 as large corporations and Private Equity (PE) firms start to deploy their record amounts of cash. Rollups of related companies will accelerate in 2014 as companies seek critical mass and Initial Public Offerings (IPO) are expected to grow exponentially in 2014.
Accounting firm KPMG recently commissioned a survey with respect to the prospects for consolidations. Study findings included:
- 60% of respondents said that large cash reserves would accelerate deal flow and 40% indicated that favorable credit terms would drive activity.
- Primary drivers of activity increase: companies expanding their geographical reach (20%); PE buyers seeking more profitable operations (19%); and companies pursuing line of business expansion (17%).
- Key industries for deals: software and telecommunications, healthcare and pharmaceutical.
Private companies should prepare for enticing calls from PE firms and corporate buyers. Be prepared with a strategy to explore and seriously consider the “deal that may be too good to pass up,” and don’t leave money on the table by trying to negotiate against experts.
How to Manage a Successful Exit Negotiation
Most entrepreneurs tend to be rather good at negotiating. They have the most to gain or lose in any deal, are calculated risk takers, have the vision, and also have an innate sense of how to be creative and structure a deal. Most important, they have high aspirations and an innate yearning to expect more out of any deal.
But as the business grows, demands on the entrepreneur’s time can change radically. No longer able to deal directly with vendors and customers, he or she will delegate these tasks to others. Who this “next in line to negotiate” is can be a critical decision to the future of the entire enterprise. Handing over the reins should be a matter of qualification and experience rather than convenience.
A CEO must be able to ensure that the processes and people are in place to negotiate an exit for the company. There are four traits that you need to have or hire in order to manage a successful negotiation: attitude of high achievement, an understanding of power sources, bargaining skills, and adequate preparation.
- High Aspirations: This means the negotiator always expects more out of an exchange than the average person. They know what they want, how much they want, and what they are willing to do to get it. As a rule, people with this trait get more in the end. They tend to be calculated risk takers based on both their perception of the value of the reward they’re after and their tolerance for risk. They set high goals, make high but reasonable initial demands, and do not readily settle for less. (This is an innate trait and cannot be taught — you must hire it!).
- Understands Power: This trait is a person’s ability to sense internal and external power sources and use them to influence the other side. They can also neutralize or minimize the other side’s use of power by knowing there is always a balance of power. They know they always have power, even if they really don’t, as long as they can convince the other side that they have it. The reverse is also true. (Awareness of power can be taught — but a high tolerance to risk is critical).
- Bargaining Skills: These traits involve the ability to use a variety of offensive and defensive tactics as well as concession and countering skills to gain advantage and get what’s desired from the exchange. A variety of passive and aggressive tactics and counters are used to implement and defend strategy and influence the other side’s aspiration level. It means being able to force the other side to work hard for everything they get. (To some degree, these skills can be taught and coached).
- Preparation: This is perhaps the most important of all traits. Research has proved that average negotiators who are well prepared can perform as well or better than skilled negotiators who are less prepared. It means being fully prepared before important encounters by having a plan, knowing what’s at stake, what you want, what you’ll give to get it, what your strategy and tactics will be, what the other side wants, profile data about the other side, “Plan B”, etc. (This trait can be taught and coached).
Entrepreneurs become naturally effective negotiators because they’re working for a somewhat selfish goal — themselves and their company. They have the most to gain or lose in any negotiation. When these tasks are delegated internally or outside of the company, insist that your negotiator is well prepared, properly coached, offered incentives for success, and possesses the four traits for a successful negotiation.
Michael L. Evans and Sam R. Johnson are partners with the Newport Board Group.