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Divestiture Success

Winning strategies for a successful business sale

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Assetsaresoldforanumberofwidely-differingreasons.ThetwomostcommononesIhaverepeatedlywitnessedare:Sellingabusinessthathasbecomenon-core,orsellingduetothedesireorneedtoexitandcash-out.Whilesellingnon-corebusinessesusuallyhappensinlargercorporations,exitsarethetypicaldivestmentformforowner-managedenterprises.

Motivationsandapproachesforthesetwogroupsofsellersandtheirstakeholdersarefundamentallydifferent.Whilealargerorganizationmaybeprimarilyinterestedinsellingassetsthataretakinguptimeandresourcesandareunderperformingcomparedtotherestofthebusiness,theownermanagersofsmallandmid-sizedenterprises(SMEs)maywanttosellatthepeakofbusinessesgrowthorbecauseofageandalackofsuccessors.WhileM&Amanagersinmultinationalsmaybereluctanttotakeonadivestitureproject(theprocessisusuallylongandpraiserarelycomeswithnon-coreprojects),fortheentrepreneurasaleofthebusinessmaybethefinalsteptocompletethejourney.

YettherearecommonissuesthatbothcorporatesandSMEsrepeatedlyexperienceduringtheirdivestitures.WhenIaskmanagersandentrepreneursabouttheirexperiencesIoftenhearthatthedealsweretoocumbersome,didnotachievesatisfactorypricesandthatbidderswalkedaway.Manyalsomentionedthatprocessestookverylong,dealsappearedverycomplex,expectationsofbuyersandsellerweretoofarapart.Alotoftheseissuesstemfrominsufficientconsiderationandmanagingofkeystrategiesthatneedtobeappliedwhenconductingadivestiture.

InthisarticleIwillfocusonthe7keystrategiesasellermustconsiderinordertorunadivestitureprocessthatisquick,efficientandlikelytocompleteregardlessofthesizeoftheasset.IwillhighlightthemaindifferencesandviewpointsoflargecorporationsandSMEs,discusscommonmistakesthatshouldbeavoidedandconcludeonthetoprequirementsfordivestituresuccess.

1ATTAINAREALISTICESTIMATEOFYOURBUSINESS’VALUE

Howdoyouknowwhatyourcarisworth?Youmightlookupthebluebook/listvalueofyourvehicle.Andwhatifyourcarisspecial,sayaparticularmodel?Wouldyouadvertiseyourcarwithoutknowinghowmuchyoucouldgetforit?Youwouldmostlikelystarttheprocessbygettingagoodideaofhowmuchmoneyyoucouldreasonablyexpect.Thesameshouldbetrueforthesaleofyourbusiness.

The ultimate value of any business is determined by the market i.e. by the offers brought forward from potential acquirers.

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Modellingthevalueofanassettobesoldisaverygoodstartforadivestitureprocess.Suchvaluationsdonotneedtobeoverlyfancy.Norshouldtheybeoverlyexpensive(incasedoneexternally).Theyshouldbeanintegralpartofthesalesprocess,conductedjointlywiththeoperatingmanagersandtakeintoaccountthebusinessplansandrealisticprojectionsoffuturecashflows.Theanalyticalexerciseforcesbusinessleaderstofocusonconcretefactsandfiguresthatwillalsobeusedbypotentialacquirerstovaluetheasset.

Largercorporationsusuallyhaveafairlygoodideaofthevalueoftheirnon-coreassets.Theyhavetools,methodsandoftentheskillsandexperiencetoarriveatagoodapproximationofabusinessvalueintheprevailingmarketconditions.Theworthofanyassettobesoldisultimatelydeterminedbytheoffersreceivedandnetsalespriceandconditionsrealized.Wheretheystruggleisinestimatingthevalueoftightlyintegratedbusinesses.Theseneedtobecarved-outbeforethesale.Separationprocessesandthemodellingofstand-alonebusinessplanscanbeacomplexanddifficultexercise:Anoperatingmodelneedstobedefined,thecapabilitiesandresourcesneedtobeseparated,andthecoststructuresneedtobeclarified.Theresultwillbeabusinessplanonastand-alonebasiswhichformsthebasisforthevaluationoftheseparatedasset.

OwnersofSMEsregularlyoverestimatethevalueoftheirbusinessestothirdparties.Thepain,trouble,andhardworkinvestedtobuildthebusinesscreateexpectationsthatareoftennotalignedwithwhatinvestorsarereadytopay.Thiscanleadtolargedifferencesinpriceexpectationswhichshouldbedealtwithatthebeginningofaprojectratherbeforetheystopthedealentirelyatalaterstage.Useoftransactionanalysisandmultiplesthatarebasedonhistoric,comparabledealsalongsideadedicatedDiscountedCashFlowanalysis(DCF),takingintoaccounttherealisticperformanceofthecomingyears,canhelptoframeandalignvalueexpectations.

Acommonmistakeforbothlargeandsmallsellersistostartthesalesprocesswithafixednumberinmindwithoutanysupportingrationale.Thoughhighaspirationsleadtobetteroutcomesinnegotiations,ifthediscrepancyistoolarge,therewillbenodeal.Sellersshouldbeawarenottofallintotrapssuchastheendowmenteffect1andlossframing2,psychologicalreactionsthatcausepeopletobemoreinfluencedbythepainoflossthantherewardsofgain.

1Aka‘divestitureaversion’.Itisaneffectwherepeopleascribemorevaluetoobjectsjustbecausetheyownthem.2Aneffectwherepeopleweighthepotentiallossofanobjectmoreheavilythanthepotentialgains.

Do not start negotiations with a fixed number in your head without having a rational base for your expectations.

Though high aspirations lead to better outcomes in negotiations, if the discrepancy is too large, there will be no deal.

Model building will force decision makers to deal with the company’s current and future reality.

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Agoodandreasonableestimateofbusinessvalueup-frontwillhelpindecisionmakingwhenconfrontedwithseveraloffers.ItwillalsohelpyoudefineandstrengthenyourBATNA(bestalternativetoanegotiatedagreement).Theexerciseofmodelbuildingwillforcedecisionmakerstodealwiththecompany’scurrentandfuturefinancialreality.Itisagoodpreparationforthesellingprocessandforthenegotiations.

2PREPAREWELLFORYOURSALE

Preparationiskey.Thisisespeciallytrueforassetswherehighvaluesareatstake.YourexpensiveItaliansportscarhassmalldefectsinthepaintwhichyouarefixing,youarepolishingtherimsandreconditioningtheleatherseats.Nextyou’llputtogetheryourexplanationandevidencearoundwhyyoumissedthisoneoilchangeinyourservicebook,andadescriptionofwhatmakesyourparticularmodelsospecialandmorevaluablethanothersofcomparableageandmileage.

WhethercorporatebusinessorSME,theneedfordetailedpreparationisparamount.Inmostdivestituresyouonlyhaveoneshottogetitright:ifabusinessisonthemarketrepeatedly,itbecomeshardifnotimpossibletosell.Anewdivestitureattemptthenonlymakessenseafterproductdevelopmentmilestonesorsignificantimprovementstoprofitability,revenueandultimatelyearningshavebeenachieved.Allthelatterhelptochangethehistoricpictureandfutureoutlook.

Theaspectsthathavetobelookedatandpreparedcanvarystronglyfromassettoasset.Thegoal,however,remainsthesame:Theanticipationofdealissuesandthepreparationofasmoothsalesprocessandtransition.

LargercorporationsoftenneedtothinkaboutITseparationfortheirdivestmentunlessthebusinessforsalealreadyrunsfullystand-alone.Therearealwaysconsiderationsaroundhowtoprovideasliceofthemasterdatawithoutimpactingconfidentialityorcommercialsensitivity–withtheminimalamountofeffort.Thecriticalquestionmaybewhetherthesellerneedstoprepareacostlystand-aloneITsolutionwhichthebuyermayultimatelyeliminatebecauseitdoesnotmeettheirneedsorstandards.Thetransitionofpeopleandservicesalsoneedstobeplannedandexecutedcorrectly.Goodplanningandcommunicationcanmakeorbreaksuchaprocess.

Preparation is key. This is especially true for M&A where high values are at stake and, in most divestitures you only have one shot to get it right.

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Particulartoowner-managedbusinessesisthefactthattheseareoftenstronglytiedtoasingleperson,theentrepreneur.Thisrepresentsaconsiderablerisktobuyerswhowillneedtocontinuerunningthebusiness,oftenwithouttheinvolvementoftheformerowner.Iftheaimofaselleristodivestarunningoperationratherthansolelyaspecifictechnologyoritscustomerlist,structuresshouldbeimplementedtoensurethatthebusinesscanfunctionaccordingtoitsbusinessplansafterthesellerhasleftthecompany.Ideally,systemsandcultureareputinplacethatallowthebusinesstoberunonitsownandfullyindependentlyfromthepreviousowner.InSMEsitisalsocommonthatbusinesscapitalandprivateassetsareintermingled–ariskifnotdealtwithintimebeforeatransaction.Likewise,accountingpoliciesofsmallerenterprisesthatareaimedattax-optimizationcausealowerpresentationofearningsthannecessaryandleadtoareducedfuturecashflows–abasisformanyvaluations.SMEstypicallystarttheirdivestitureplansonetotwoyearsbeforetheactualsalesattemptwhichoftenleavestoolittletimetoadjustfinancialpractices(andverifytheeffects)andfillmajorroleswithkeypeopletoreducerelianceontheowner-manager.

Furthervaluationrisksincludepensioncommitments,impendinglegalissuesorweakcontractswithbusinesspartners.

Acommonmistakeistomisstheoptimaltimefordivestment.Ingoodyearswhencompaniesareacquisitiveandthesectorishot,ownersshouldbepreparedtoselliftheirbusinessesarereadyforexitandperformingwell.Anotherfrequentmistakeistoconsidersellingwhenthebusinessispastitspeakofthelifecyclecurveoroutofasuddenneedratherthanaplannedstrategy.Insomecultures,businessesareoftennotsetupwiththethoughtandaimoffutureexitbutoutofthemotivationofself-fulfillment.Insuchcasesthebusinessneedstostartpreparingforthesaleatleastthreetofiveyearsprior(dressingthebride)toshowcontinuousperformanceandthusachieveoptimalvaluations.Butbewarned:superficialgroomingcanandwillbeeasilyspottedbyacquirers,andwillonlyerodetrustintherestofyourcompellingstory.

UnderstandingthereadinessofabusinessforsaleandworkingoutitsstrengthandweaknessestoanticipatedealissuesareequallyimportanttocorporatesandSMEs.Itiscrucialtoinvolvepeoplewhocanjudgewhethercertainfindingsareunusualorcouldbeviewednegativelybypotentialbuyers.Thisisbestachievedwithprofessionalswhocanbringanoutsideviewonthebusinessandhaveexperienceofdifferenttypesofbuyersandtheirpointsofviewonspecificrisks.Therighttimingforabusinesssaleisjustasimportantasarewellpreparedfinancialsandanorganizationalsetupwhichallowsaseamlesstransitionandcontinuationofthebusinessafterthesale.

The aim of any due diligence for a seller should be to conduct a smooth and quick DD process, provide all relevant information of the asset at the appropriate times and put as little workload on operating managers as possible.

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3PREPAREFORDUEDILIGENCE

YouhavefoundseveralpotentialbuyersforyourFerrari.Theinterestedpartieswanttoseeyourproofofownership,allthepapersfromthepreviousowners,allthedocumentationofchangesregardingnon-originalparts,andtheyinsisttotakeittoanexperttobecheckedfordefectsandconfirmtheoverallcondition.Youcannotaccommodateeveryoneatthesametime.Yourbuyersaregettingimpatientandyoufearsomewilllookelsewhere.

DueDiligence(DD)assuresthepotentialbuyerthatfinancialmatters,managementpractices,operationsandlegalmattersareingoodorderandwithoutunexpectedissues/risks.Sophisticatedacquiresalsouseduediligencetotesttheirownassumptionsregardingintegration,achievementofdealobjectivesandpost-closeoperations3.TheaimofanyDDforasellershouldbetoconductasmoothandquickDDprocess,provideallrelevantinformationattheappropriatetimeswhileputtingaslittleworkloadaspossibleonoperatingmanagerswhoareneededtoanswerspecificquestionsandprovidetheinformationfortheDD.Ifdoneright,awell-preparedVirtualDataRoom(VDR)answers90%oftheotherside’squestionsinstantlyandleavesonlyaminoritytobeaskedbysubjectmatterexperts.Ifnotdoneright,aDDexercisecandragon,wastingalotoftimeandmoneyonallsides.Iftheinformationprovidedisnotorganized,structured,consistentandunambiguous,theseller’sreputationwillbedamagedjustwhenithurtsthemost.Itcandestroyvalueor,intheworstcase,theinterestofpotentialbuyerscompletely.EvenwithgoodpreparationtheDDmustbemanagedbyskilledandexperiencedprojectmanagerswhoareabletoanticipateissues,blockunreasonablerequests,establishacompetitiveenvironment,involvetherightsubjectmatterexpertsattherighttime,andguideeveryoneinvolvedthroughthisstrenuousprocess.

LargercorporationsareusuallywellversedwhenitcomestoDDpreparationforstand-alonedivestitures.Forcarve-outshowever,thesituationisoftendifferent:Carve-outsareinfrequent,historicdataofthe‘stand-alone’operationdonotexist,andtheprocessislessstandard.Thiscausessimilardifficultiesasexperiencedbysmallerandmid-sizedbusinessinregularsalesprocesses.

Settingupawell-organizedandefficientprocessesforstraightdivestiturescreatesmuchmoreofachallengeforSMEs.Especiallydifficultisthepreparationofrationalesanddetailstobolsterthecredibilityoftheremainingdocumentation.Wherecompaniesarenotrequiredtohavetheiryear-endresultsaudited,wherenointernalcontrollingsystemsexistor3Formoreinformationonthistopic,readConnectingtheDots;BeyondtheDeal,2012.

Appreciate that the DD process is already part of your negotiation. Do not start with an incomplete data room, filling it over time according to the requests from the other side.

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whereIT-landscapesarenotintegrated,internalfinancialdataandanalysesneedfirsttobecreatedor,asdiscussedabove,balancesneedtobeadjustedornormalizedtoreflectreality.SomeofthesetaskscanbeperformedatthebeginningoftheDDpreparation,othersneedtobeplannedwellbeforeadivestitureprocessstarts.

AcommonmistakeistostartDDwithanincompletedataroomandfillitovertimeaccordingtoinformationrequestssubmittedfrominterestedparties.Thispracticewillcauseyourmanagementtobecontinuouslybusyproducingdocumentsundertimepressurealongsidetheiroperatingbusinesses;itwillalsogivetheimpressionofdisorganizationandpoorpracticeswithinyourorganization:Datayousubsequentlyprovideisatriskofbeingunstructured,ambiguousandinconsistent.AnothermistaketoavoidisconductingmultipleDDprocesseswithseveralpartiesatdifferenttimes.DueDiligenceshouldbeconductedoncetoreduceworkloadandtosupportacompetitiveenvironmentinvolvingmultiplebiddersinparallel.

InvolveallrelevantsubjectmatterexpertsandaskilledprojectmanagerearlyinpreparingforDueDiligence.Createawell-structuredVDRandprovidetherightinformationattherighttime.Createclearandconsistentinformationwhichsatisfiesthebuyer’sneedsandaddressesallmaterialareasofthebusiness.Don’tholdbacktoomuchinformation,norexposeyourselftounnecessaryriskbyrevealingconfidentialdatatooearly.HavetheVDRreadylongbeforediscussionswithinterestedpartiesstart,andappreciatethattheDDprocessisanintegralpartofyournegotiation.Processlettershelpthesellersettherulesoftheprocess,whileDDallowsthesellertodemonstratepowerandbuildtherequiredrelationshipswiththepotentialbuyers.Theserelationshipsareamongthekeycomponentsofanyprofessionalnegotiation.

4ESTABLISHANDMAINTAINACOMPETITIVEPROCESS

Youcouldn’tmeetalltherequestsfrompotentialbuyersatthesametimeandhavenotheardfromthemlately.YoudiscoverthatallofthepotentialbuyersforyourFerrariTestarossahavegonecold,exceptforoneperson.Heisstillinterestedbutstartshagglingonprice.Consequentlyitdropssignificantlyandyoudecidetostopthesellingprocessandpostponeit.Halfayearlater,youstartagain.Youareprepared,youhavemultiplebiddersandyoutellthemabouttheotheroffers.Thisway,youestablishanauctioninwhichonebuyerofferssignificantlymorethantheothers.

Establishing and maintaining a competitive process is not as hard as many believe. With sufficient preparation and a structured sales approach, competition will emerge and can then be managed.

Once the DD starts it should not stretch out unnecessary, because speed of deal making and ultimate deal success do correlate.

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Establishingandmaintainingacompetitiveprocessisnotashardaspeoplethink.Itislargelyamatterofsufficientpreparationandastructuredapproach.IftheVDRissetupandreadyinadvance,andtheprocesshaskicked-offatthesametimeforallparties,itisonlyamatterofcoordinatingtheDDandthenegotiations.Additionalinterestedpartiesmayshowupduringtheprocess–andwecanbehappyiftheydobecausetheseareoftenthemostinterestedgroups.Theyhaveheardaboutthesalethroughthemarketandwereinitiallynotconsideredbuthavetrueinterestthatissostrongthattheyturnupuninvited.Howtohandlesuchpartiesdependsonhowfartheprocesshasgone,howmanyareinvolved,etc.Toacertainextent,theappearanceofsuchbiddersattoolateastagecanbeavoidedbyleavingenoughtimefromthedaytheshortlistedpotentialbuyersareaddressedandthestartofDueDiligence.OncetheDDstartshowever,itshouldnotstretchoutunnecessary,becausespeedofdealmakingandultimatedealsuccessdocorrelate.ButaskillfulM&Amanagerwillfindwaystoevaluateuninvitedguests,testtheirmotivationandcatchthemupwiththeothersintheprocess.

Maintainingcompetitiononlybecomesdifficultwhen–despiteallyourstructureandabroadreachtoallinterestedparties,notenoughpotentialbuyersemerge.Maintainingcompetitionisalsodifficultwhendecisionmakersdecidetoapproachpotentiallyinterestedbuyersoneatatimee.g.to(attemptto)minimizerumorswithinthecompanyorinthemarket.

Forlargercorporationsthedynamicsarounddivestituresareoftenunpleasant.Executivemanagersfeartheaccusationofsocialirresponsibilityiftheircompanyisverysuccessfulbutseparatesnon-profitableparts.Discussionswithunionsandthepotentialforbadpressmaketheseprojectscritical.Executivesalsotrytoavoidrumorsthatcannegativelyimpactthemotivationandmoraleofemployees.That’swhybilateral‘gentlemen’sagreements’areoftenfavored-andpoordivestituresfollow.Fortunately,alloftheseunintendedconsequencescanbecontrolledorevenavoidedwithgoodpreparationandarobustcommunicationsstrategy.

ForSMEs,bilateralprocessesbeginlessoftenoutofaconcernfornegativeconsequencesbutoutofopportunity.Ownermanagersmightbeapproachedbyaninvestorandtheystartasalesprocess,curiouswhatthepotentialbuyermightoffer.Ortheystartadeliberatesalesprocessaddressingthefewdirectcompetitorstheyareawareof,confidentofthefactthattheyhavemanagedtheirentirebusinesstothispointandcanjustaseasilysellit.Theyaremostlikelyignorantoftheconsequencesofapoorly-runprocess.

Common mistakes in running the process are unstructured, insufficiently prepared and lengthy processes, not paying attention to employee retention and motivation, too little and inconsistent communication.

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Alongsidethelackofanauctionprocess,it’sjustasbadtostarttheprocesswithtoofewpotentialcandidatesandthensearchingforadditionalbuyersastheprocesscontinues.Suchinsufficientpreparationcanleadtopotentialbuyersshowingupwhenothershavealreadylefttheauction,orfailingtoactbecausetheydidnotfeeltheneedtomovequickly.Alengthy,drawn-outprocessisdemotivatingtoM&Amanagers,operationalmanagers,employeesandtheownersandshouldbyallmeansbeavoided.

Toestablishcompetitionitisvitaltoreachoutbroadly,haveallstructuresinplacebeforetheprocessstartsandseektorunallgroupsthroughaparallelprocess.Whileitusuallyisnotwisetohavedetailed,parallelnegotiationswithseveralparties(simplybecausethecomplexityandworkloadrises),everyoneshouldbekeptonboardandthefavouritesshouldbetreatedequallyuptothepointwhendetailednegotiationoftheSalesPurchaseAgreementcommence.

5RUNARIGOROUSPROCESS

JustbeforethesaleofyourFerrariistobecompletedyoudiscoverthattheregisteredkeeperofthecarisyourex-spouse,asetupyouhadchosenfortaxpurposeswhileyouwerestillmarried.Ifyoucannotmakeanagreementwithyourexquickly,youwilllosethebuyerandhisattractiveoffer.

Divestitureprocessesareexpensiveandtimeconsuming.Oncestarted,theyshouldleadtoasuccessfultransaction.Thereisnothingmoredemotivating(forthoseinvolvedinthetransaction)thanbeingclosetothesaleonlytodiscoverthat:

- Executivemanagementdoesnotwanttosell(anymore)- Thereareregulatory,legal,etc.hurdlesthatmakethesale

impossible- Theconditionswhichcomewiththesalearenotacceptabletothe

ownermanager- Thelastinterestedpartywalksawaybecausenoagreementcanbe

reachedonpriceandconditions

Thereasons,motivationsandconsequencesofthedivestituremustbeclear.Similarly,themandatefromthetopexecutives/ownerstosellandthegoalstheywishtoachievemustbesimilarlyclearandfirm.Theadvancepreparationandstructurementionedinmyearlierpointswillsupportthismandateandhelpyouavoidtheabove‘landmines’.

Butevenwhenthesecrucialpointsaremet,thereareotherhurdlestoovercome.Asdiscussedabove,alltoooften,especiallywithlargercorporations,businessesforsalearecloselyintegratedinalargergroupsharingserviceslikeIT,HR,supplychain,etc.Theassetsneedtobe

Communication is one of the most underappreciated but most powerful tools in M&A.

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separatedandtransitionalservicesagreementsusuallyneedtobeprovidedforadefinedperiod.Thecomplexityofdivestmentsisoftenraisedduetothesensitivenatureoftheprocess.Executivesmaybeconcernedaboutnegativepress,workscouncilissues,layoffsbythebuyer,andsohavetomanageinternalinterestscarefully.TheM&Amanagerwillhavetobalancetheinterestofthedifferentgroupsinvolvedandcoordinatethemanycross-functionalinteractionsthatcaneasilyputthetransactionintonegotiationlimbo.Divestitureprocessesareusuallyquitelengthy(6to9months)andrequirethefullattentionoftheM&Amanager,aswellasresourcesfromotherpartsoftheseller'sorganization.Therighttoolsetandexperiencewillhelptotacklethesechallenges.M&Aprocessesfollowacertainorder.Wellestablishedprocessstepsandprocedureshavebeenformedbecausetheyarenecessaryandhavebeenproventowork.WhilelargerorganizationshaveM&Aplaybooksandbestpracticessuchknowledgeandexperienceisoftenabsentinsmallerfirms.OwnersofSMEsmaysometimesbetemptedtodothingsdifferently.Theyfollowunconventional,hands-onapproaches,sometimesevenwithsuccess.ButIhavecomeacrossmanythatwereunsuccessfulforexactlythesereasons.Commonmistakesinrunningadivestitureareunstructured,insufficientlypreparedandlengthyprocesses.Theyrangefromdiscussingkeypurchaseagreementdetailstoolate,notpayingattentiontoemployeeretentionandmotivation,toolittleandinconsistentcommunication,negotiationpowershifts,notsettingtherightincentivessothatoperationalmanagersstayloyaluntiltheendofthedeal,tooearlycelebrations(adivestitureisonlydonewhenitisclosed,neverbefore),etc.,etc.Theissuesaremanyandarebestunderstoodandaddressedthoughexperience.Inordertoavoidthesemistakesyouneedtobuildtheinternalcapabilityofadedicated,experiencedmanagerwithalongtrackrecord,orgetexternalsupportandguidancethroughthesepotentialdifficulties.Toavoidvitalmistakesandrunasuccessfulprocess,managementandprojectmanagersneedtobeskilledandexperiencedinthe“M&Agame”.Theyshouldhaveasetoftoolsandbestpractices(M&Aplaybook)thatguidetheorganizationthroughthecomplexityoftheprocess.IfsuchskillsaremissingbothlargerorganizationsandownermanagersshouldobtainsupporttotesttheirorganizationforM&Areadiness,assesscapabilitygapsandbuildrobustprocessesthatenabledivestituresuccess.

Deal negotiation is the area of deal making which has the biggest impact on value and risk. Yet it is the part of M&A that is often disregarded the most in terms of preparation, strategy and structure.

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6PREPAREFORNEGOTIATION

Yourex-spouseunderstandsthesituationyouareinandiswillingtosignthepapersmakingyouthesoleandrightfulowneroftheFerrari,butonlyifyouarewillingtoabidebyalengthycontractshehascreatedwhichincludesseveralconditions.Thecontractseemscomplicatedbutyoucan’tdetectanylargerissues,soyousignittobeabletofinalizeyourcarsale.

Dealnegotiationistheoneareaofdealmakingwhichhasthebiggestimpactonvalueandrisk,yetitistheonepartofM&Athatoftensufferstheleastamountofpreparation,strategyandstructure.Negotiationisanart,andthoughweallnegotiateeverydayinlife,noteverybodydetectsorunderstandsthegamesthatareplayedduringM&Adeals.Tobecomeagoodnegotiator,bothtalentandexperiencehelp.Buteffectivenegotiationcanalsobelearned,andalltopnegotiatorshavedevelopedtheirskillsovertimeinadisciplinedfashion,withpracticeandfeedback.

Inlargerorganizations,M&Adepartmentsoccasionallyhavespecialnegotiatorswhocomeinataparticularpointduringthedealtodiscusstheissues,makedecisionsand‘bringithome’.Morecommonly,negotiationisseenasjustanotherpartoftheM&Amanager’sresponsibility,typicallysupportedbyseniordecisionmakerswhowillcomeinandnegotiatethefinalstagesofthedeal.Eachoftheseoptionscarriessomerisk:

1) Wherededicatednegotiatorsareused,thequestionofefficiencyarises.Let’sassumetheyhavenotgrownsolelyintothispositionbutaresufficientlywelltrained.Iftheydidnotfollowthedealfromthestart,dotheyknowallthesubtlenuancesthatarenecessaryforthenegotiation?Howarethesepeopleincentivized?Cantheybeobjective,thinkbeyonddealclosureandactintheinterestoftheircompanyratherthantheirbonusandcareer?

2) WhenM&Amanagerssteerthedealaswellasthenegotiationthequestionarises:Howwellaretheytrained?Dotheyapplymethodsotherthanpositionalbargaining4?Aretheylearningonthejob,givingawayrisksandissuesthatcouldbeworthmillions?Thismightbeaconcerntomanyexecutiveswhodecidetostepintotheringthemselves.

4Positionalbargainingisazerosumgame.Incontrasttointegrative(alsocalledinterest-based)bargainingpositionalbargainingdoesnotfocusontheunderlyinginterestsofthepartiesorsearchforoptionsto‘expandthepie’;itfocusesontheissuesandstartingpositionsandassumesa‘fixedpie’.

Executive decision makers should oversee the strategy of the process and make the final decisions. At no time, however, should they interfere with the negotiation itself. Such action is only to the benefit of the other side and hardly ever in the best interest of the company and their stakeholders.

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3) Whenexecutivesnegotiatethedealtheissuescanbecomeevenlarger.Theymighthavebigegosthatgetintheway.Asthemostseniorindividualontheirsideofthetable,theycannotbackpedalonanythingtheyhavesaid.Professionalnegotiatorsneedtobeconsistentiftheywanttobecredible,butunlikeseniorexecutives,theycaneasilybeexchangedwithinaparticularprojecttoovercomeanynegotiationhurdles.Butwhenseniorexecutivesparticipate,therearenofurtherescalationpoints,norarethereoptionsto‘hotswap’themforsomeoneelse.Inaddition,seniordecisionmakersusuallycomelateintotheprocessandareunawareofsubtlenuancesthathaveevolvedearlierintheirabsence.Onceseniorexecutivestakeover,thenegotiatorsareautomaticallydowngradedtofootmenandtheyloseanyabilitytoleadorinfluencenegotiationsafterwards.

TheownermanagerofanSMEusuallynegotiateshisM&Adealhimself,inwhichcasealltheissuesinpoints3)apply.Inaddition,therelationshiptotheowner’sbusinessisstronglyemotionalanditwillbedifficulttostaydistantenoughtomakerationaldecisionsindifficultsituations.Asolutiontotheseissuesistohaveanegotiationexperttakecareofthebargainingandlettheownermakethestrategicandultimatedecisions.Suchexpertsneedtobeinvolvedfromthebeginningoftheprojectandattendallmeetingswiththeothersidetocatchallthenuancesandinformationthatwillmakethedifferenceduringthebargainingprocess.Itisimportanttochooseanexpertwhoisindependent,objectiveandunderstandsbusinessfromanoperationalsideofthings.Yourbroker,lawyeroraccountantmightnotnecessarilybetherightpersonduetotheirpotentialbiasandrelativelackofoperationalexperience.Wherein-houseexpertsareused,therightgovernanceneedstobeputinplacetoincentivisesuchdeal-makersnottowardsdealclosingbutdealdelivery.Otherfrequentmistakesduringnegotiationinclude:

§ Toolittlepreparationbeforethenegotiationstarts§ Noclearmandate,strategyornegotiationframework§ Insufficientpreparationbeforeeachsession§ Suboptimalteamcompositionanddynamics§ Insufficientlistening,toolittletrustbuilding§ Toomuchpositionalbargaining§ Toomuchdesiretomakethedeal§ Acceptingriskorgivingawaypointstooeasily§ Executiveswhoarenegotiatingthemselvesratherthanremaining

decisionmakersinthebackground

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Successfulnegotiationstartswiththoroughpreparation.Itcontainsthegatheringofinformationabouttheothersideandthepreparationofthenegotiationframework.Structureandstrategythroughoutthenegotiationprocessisamust.Soistherightmake-upofthenegotiationteamandtheappliednegotiationstyle.Anidealteamconsistsofonenegotiatorandoneobserver.Theobserverassessesthecounterpart,collectsquotesandargumentsandanalysestheirmotivationsandBATNA-whilethenegotiatoreitherlistensactivelyorbargains.Everynegotiatorwillhaveanaturalpreferenceonstyle.Agoodnegotiatorwillbeabletoadapttothecircumstancesandguidetheothersidetowardsacollaborativestylethatallowsthebestoutcomeforbothsides.Thecyclicalstructureeverynegotiationshouldfollow(beforeeachnegotiationsession)isdepictedbelow.

Figure1-Cyclicalnegotiationstructure

Themostexperiencedandsuccessfulmanagersarenotnecessarythebestnegotiators.Fewerthan4%ofmanagersreachwin-winoutcomeswhenputtothetest5.Someseniordecisionmakersdonothavethetimetoabsorballthedetailrequiredinanegotiation.Anotheraspectofseniorityandsuccessisthatitcanleadtooverconfidence,resultinginmoreunsuccessfuldeals.6Therefore,makesureyournegotiatorisanexpert,withtrainedandprovenskills.5Nadler,J.,ThompsonL.,&vanBoven,L.(2003).Learningnegotiationskills:Fourmodelsofknowledgecreationandtransfer.ManagementScience49(4),529-540.6Thisisdescribedbythebeautifulterm„self-reinforcingincompetence“.SeeBillet,M.T.,&Quian,Y.(2008).AreoverconfidentCEOsbornormade?Evidenceofself-attributionbiasfromfrequentacquirers.ManagementofScience,S4(6),1037-1051.

M&A contracts should be well understood by decision makers. Any uncommon requests and clauses should be pointed out and interpreted by their M&A professionals with regard to risks and consequences from a legal, financial and operational standpoint.

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About80%ofyoureffortsshouldgotowardpreparationandtheremaindershouldgointotheactualworkofnegotiation.Makesureyouhavesetanegotiationframeworkwithaclearmandate.Preparealistwithyournegotiationissuesandgoalsandplanaheadforeachsession,takingintoaccountyourstrategy,tacticsandargumentyouwillusetoreachyourgoals.Withtherightmixofpreparation,theinvolvementoftherightpeople(trainedM&Amanagers,professionals)andabalancedteamstructureyouwillbesittingonthewinner’ssideofthedealtable.

7UNDERSTANDEXACTLYWHATTHECONTRACTSAYS

Youarenowthesoleandrightfulownerofthecar.Yousellittothebuyerwiththehighestoffer.Butjustasyoustartcelebratingyourdealyoureceiveaphonecall.Youhadn’treallyunderstoodallthetermsinthecontractanditturnsoutthat-asyourspouse’slawyernowexplains-youwillhavetosharetheproceedsofthesalewithher.Healsomentionsthatthebuyerhappenedtobehernewboyfriend;heownsacar-dealershipandgoesontoselltheFerraritoaforeigncollectoratahugeprofit.

MorethanoncehaveIcomeacrosspoorlynegotiatedcontracts:Complicatedlanguage,alackoftime,afeartoaskquestionsandrevealignorance,orotherreasonshaveusuallycontributed.Despiteskilledandexperiencedlegalcounselsalwaysbeingpartofthefinalizationofcontractsinlargerorganizations,theseissuesstilloccur.Reasonsincludeinternalpolitics,poorleadershipbehaviorandtheoverly-narrowinvolvementoflegalprofessionalsthroughoutthedeal.

Ownermanagersespeciallyshouldalwayshave(legal)M&Aprofessionalsintheteam.Theyshouldnotattempttofinalizeasalebythemselves,acceptingcontractsoutrightfromtheothersideeveniftheyseemfairandeveniftheywereassuredthattheconditionsarestandardandtotheiradvantage.

Regardlessofsizeorsituation,thecompositionofM&Acontractsshouldbewellunderstoodbydecisionmakers.AnyuncommonrequestsandclausesshouldbepointedoutandinterpretedbytheirM&Aprofessionalswithregardtorisksandconsequencesfromalegal,financialandoperationalstandpoint.Anyimpactshouldbeclearlyunderstoodandnodecisionmakershouldacceptacontractthatisnotentirelyclear.

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Othercommonmistakesincludethelateinvolvementoflegalcounsels,insufficientreviewbyoperationalmanagers,afeartoaskquestionsabouttermsthatthedecisionmakersdonotunderstand,anduseofa(professional)missinglinktohelptranslatetechnicaltermsintobusinesslanguage.

FullyintegratethelawyersintotheM&Ateam.Donotseparatethemfrombusinessnegotiations(unlessifneededonrareoccasionstobuildtrust),anddonotstayabsentwhenlegalnegotiationstakeplace.TheremustbeatleastonemanagerabletoconnectallthedotsinanM&Aprocess,someonetaskedwithattendingallrelevantmeetingsandreviewingalldocumentation.Presentalltherisksandconsequencesofthecontracttoyourdecisionmakers,especiallywhentheydeviatefromthenorm.Ensureyourdecisionmakersunderstandtheconsequencesofthecontractandwhattheycanmeanincurrentorfuturemarketsandbusinessconditions.

Anyassetofvaluecanbesold.Thequestionisforwhatprice.Wherethereissubstanceandagoingconcern,thereisusuallyabuyerwillingtopaymarketvalue.Thisistrueevenforbusinessesindistress,forwhichsuccessfultransactionsaremadeeveryday.Butthebestresultscanonlybeachievedwhenclear,rationalexpectationsandmandatesexistandarecommunicated;theprocessandnegotiationsarewellprepared;acompetitiveprocessisconducted,andthecontractisperfectlyunderstood.ThechallengesforSMEsandlargecorporationsdiffer,butonefactremainsthesame:divestituresarecomplex,timeconsuming,andexpensive,soneedtobedesignedandruntoworkrightfirsttime.Don’ttakechances:Ensurethatyourprocessisquick,efficient,andlikelytocomplete.Thiswillprimeyoufordivestituresuccess.

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ABOUTTHEAUTHOR

StephanJansenisaspecialistinM&Atransactionsandnegotiation.Heisapartnerandglobalheadsell-sideofBeyondtheDeal,abusinessthatprovidesM&A,divestment,integrationandseparationadviceandsupporttoclientsworldwide.InadditiontoleadingM&Atransactions,Stephanadvisesmid-marketbusinessesandcorporatesonacquisitionstrategy,carve-outs,divestments,aswellasexit-/succession-strategy.Heisalsoanegotiationtrainer.

BeforejoiningBeyondtheDeal,StephanwasdoingM&Ainlisted,internationalcorporationsactiveinthePharma,Generics,Healthcare,Lifescience,MedTechandDiagnosticmarkets.BasedinGermany,Stephan’sworkhastakenhimacrosstheglobewherehewasinvolvedinmorethanahundreddeals.Stephanishappilymarried,believesingenderequalityanddrivesafamilyvan.

Hecanbecontactedatstephan.jansen@btd.consulting

BTDisanindependentspecialistfirmprovidingM&A,divestment,integrationandseparationsupporttobusinessesaroundtheworld.

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UNCONVENTIONALWISDOM:Followingthesesixoftenneglectedtaskscanchangethegameinyourfavor:

1. Rightfirsttime.Don’ttrytoselltoselectedparties.Makeitaone-timecompetitiveprocess.

2. Thinkahead.Knowyourrisksandweaknessesandpreparetoanticipatedealissues.

3. Smooththeway.Preparelogical,coherentinformationforyourVDRandmanagetheDDprocesssmartly.

4. Coachparticipants.PrepareyourmanagementforQ&Aandformanagementpresentations.Don’tleavetheirperformancetochance.

5. Negotiatetowin.Prepareyournegotiation,buildanegotiationstrategyandexecuteitskillfully.

6. Communicationiskey.Makeyourmessagespreciseandconsistent.Getthoseinvolvedtoworkwithyouratherthanagainstyou.

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