July 2018 | Przegląd Piekarski i Cukierniczy (Baking and Confectionery Review)
SELLING THE COMPANY
Most owners may be apprehensive about the process of negotiation. After all, the subject of the negotiations will be their life’s achievement, their accomplishments, their own work of many years.
There is a common stereotype of tough negotiations, where on the other side of the table there appear ruthless and perfectly trained negotiators who, in a heavy atmosphere of talks, will gradually and systematically lower the company’s value. Every concession will cost us another few hundred thousand zlotys. What are these negotiations for? After all, the bakery owner gains nothing from them. The aim of the negotiations is not to raise the price of the bakery but to lower it. For most owners the process of negotiation is a compulsory stage which they would prefer to have behind them.
Today we will look at how typical negotiations conducted by the professional negotiators of private equity speculative funds may proceed.
Negotiations may take various courses; however, the first two stages described here take place almost always. This inconspicuous beginning is the most important stage of the negotiations; their further course is only a consolidation of the advantages obtained then.
W-MOSZCZYNSKI ppic 7-18For the negotiations the owner should hire a professional negotiator. Depending on the size of the company, the cost of such a person amounts to between 1 and 10% of the value of the transaction. One’s own negotiator is therefore not cheap. Negotiations are usually accompanied by great emotions on the part of the owner. The hired negotiator is often helpless in the face of the seller’s emotional activity.
The task of this article is to point out to interested persons certain regularities and negotiating techniques, in order to guard them against typical mistakes during negotiations.
The scenario for the opening of negotiations presented here is a standard one, which is effective when the selling side does not know it. At the same time it is hard to call it manipulation, because everyone is free to talk about holidays or to ask simple questions.
Phase one: the conversation
The entrance of the negotiators is usually accompanied by jokes in the style of: „today we are buying the best company in the world”, or „Mr Jan, do you already know what yacht you will buy for yourself after selling the company?”. The aim is by no means to relieve the atmosphere, but to convey the message: we are not afraid of you and we are self-confident.
In negotiations the buyer’s most important ally is the seller’s emotions.
Usually, in the investors’ interest, the negotiations take place on the premises of the company being sold. This favours the intensification of the seller’s emotions. It is a principle that, when choosing the place, rooms without windows and without clocks are avoided, because such conditions may prolong the negotiations on the sellers’ part.
At the start, experienced negotiators try to seat their counterparts in a place where they will be slightly distracted. A place opposite a window causes the seller subconsciously to want to end the negotiations as quickly as possible.
The first phase of negotiations consists in establishing friendly relations with the sellers. The owners of companies being sold often expect that the atmosphere of the negotiations will be stiff and rather unpleasant. Most often, however, it is the opposite. Experienced negotiators are able to relax the atmosphere and introduce many friendly touches.
Usually in the negotiating team there meet people who have worked together for several weeks on preparing the transaction. Between them and the owner a thread of understanding has managed to form. The phase of friendly conversations usually lasts a dozen or so minutes. So we talk loosely about our interests, our feelings and the things which we have in common.
An important element of the negotiations is the buyers’ pointing out of the company’s merits. Professional negotiators never criticise the object which they are buying. Nor do they argue why they want to lower the purchase price. Arguing one’s case is received differently – as lecturing. Both criticising the bakery and lecturing its owner always lead to a worsening of relations, and these must be good, because that is the basis of the typical negotiating strategy. The next, third principle is that in negotiations both sides must feel like winners. If one of the sides is clearly dissatisfied with the negotiations, various unforeseen consequences may follow. Professional negotiators will never allow such a situation.
The task of the stage described here is to create in the seller the impression that everyone, both buyers and sellers, are one team which together has to cope with difficulties. Both sides have the common goal of concluding the negotiations. Great emotions and the new situation cause the seller to begin to perceive the end of the negotiations as a relief.
An additional trick is to talk during the loose conversation about one’s holidays, foreign travels, yachts and historic monuments, and expensive restaurants. The visualisation of the benefits of concluding the negotiations creates in the seller the temptation to have all the difficult things behind them.
Phase two: the tremor
The pleasant atmosphere of the talks and the awareness of the reward being near always lead to a weakening of emotions and an improvement in the seller’s mood. At the appropriate moment the question is asked: „Mr Jan, you see that we appreciate your bakery, we are here to buy your company. Mr Jan, for how much do you really want to sell it?”
In the vast majority of cases, it is precisely at this moment that the greatest price discount occurs (at this moment the fall in price may reach as much as 20%).
This is important and worth remembering – negotiators never accept such a price discount. They cannot accept it, because if they were to say: „All right, Mr Jan, let us sign the contract”, the owner would think that the price discount was too large and that he is now selling the company too cheaply. In an extreme case this may lead to a breaking off of the negotiations, or at best to a feeling of loss and bitterness in the seller after the negotiations.
So the standard reply is: „Well yes, we were expecting a bigger reduction, we appreciate the value of your bakery, however we are not prepared for such a sum”.
Phase three: confusion
Now the talks may go in various directions. For example, the negotiators may propose many different, rather complicated options for buying the company. They may propose buying only part of the shares or of separated areas of activity, or propose various options for financing the transaction. The reason for these proposals suggested to the owner is the search for a solution as to how to buy the company despite the still high price.
The true aim of these manoeuvres is to create a feeling of guilt in the seller, because, as we remember, the seller feels like a member of the team, and the goal of everyone is to conclude the negotiations. The proposals must be complicated so as to cause discomfort in the seller.
A good negotiator is not the one who is unyielding, but the one who has a strong psyche, so as not to let themselves be drawn into the psychological game of professional negotiators.
If at this stage of the negotiations the owner becomes unyielding and rejects the complicated proposals, a break is announced. Then the negotiator shows that he has to go out to make a telephone call. This is a further persuasion exerted on the seller. In the background there appears the negotiators’ boss, who is somewhere far away and is to take the decision whether the company is to be bought at such a price or not. So the classic figure of the bad policeman appears. Now the seller and the buyer are dependent on the decision of a third party; they are again in one team and again striving towards one goal.
In the set of typical negotiating tools there appears one more method, alternative to the one described above. It looks more or less like this: „Of course we can buy your company at this price and it would be a very good price for us, but we have a problem with… the plot of land which has to be reclaimed”, or „with the technology, which threatens safety”, or „but we have a problem with that court case, which may threaten the company’s development”. The negotiators show that there is some obstacle on the road to concluding the negotiations. They suggest that our team, that is, the sellers and the buyers, have a common problem with something which is not accepted by the investors. Again a third party appears. The sale price plus the cost of reclaiming the plot together exceed the budget allocated for buying the company. Again the „bad policeman” appears in the form of undefined investors, and a request to the owner for help so that the team can successfully finish the negotiations.
This, in great simplification, is what a pessimistic scenario of negotiations may look like. That is why, in order to avoid a negative course of the talks, one should prepare for the negotiations themselves for at least several weeks. Without mental preparation, the negotiator we have hired will be helpless in the face of the emotions accompanying the sale of the company.
How to prepare for negotiations we will learn in the next articles in the series: „how to sell a confectioner’s shop or a bakery”.
Wojciech Moszczyński
Wojciech Moszczyński — graduate of the Department of Econometrics and Statistics of Nicolaus Copernicus University in Toruń; specialist in econometrics, finance, data science, and management accounting. He specializes in the optimization of production and logistics processes. He conducts research in the area of the development and application of artificial intelligence. For years he has been engaged in the popularization of machine learning and data science in business environments.
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