Rick Gould

In an M&A transaction, the ultimate goal should be to resolve any impasse that arises through an approach to negotiate based on the interests of the buyer and seller. You should always be willing to negotiate. You must be willing to sit down with your adversary—preferably face to face—and attempt to make a deal that serves your interest better than your best alternative.

Absent that, the deal is dead on arrival.

You thought this buyer was the right buyer. All the boxes were checked: culture, fit, clients, excellent possibility for cross-referrals, diversified specialties, high-quality management team and an amazing brand that would enable you to enhance your own brand. When an impasse is reached, we need to do a cost-benefit analysis. As a seller, you need to ask: What will it cost to walk away and restart the process of finding the right buyer?

Here’s an actual example in which I represented the seller.

In this case, the main issue was the percentage of the down payment at closing. The seller had a $15 million firm with 22 percent recasted EBITDA. The seller’s Valuation was $16.5 million. The seller wants 50 percent of the Valuation at closing, on the high side. The buyer’s acquisition model was 30 percent at closing, normal for PR M&A models for a $15 million firm. Buyer and seller have gone through many Zoom meetings and both are stuck in their position. They also disagreed on the multiple to be used.

We said it was 5x. The buyer said 3x, which was ludicrous ($9.9 million valuation). The buyer based their position on one previous deal negotiated. They were inflexible. So, we needed to look at the interests of both buyer & seller.

The seller’s position on valuation was based on industry standard, factual, historical deals in the past three years. The buyer, however, was correct on the norm for the downpayment.

We were frustrated by the inflexible buyer regarding the multiple norms and the resulting valuation and what my seller client was asking for 50 percent at closing, definitely was on the high side for a strategic acquisition by a larger PR agency.

What I was looking for was ways to expand the pie, make trades that would satisfy the buyer and enable my seller client to get the valuation necessary to not walk away.

Face-saving was at the root of this negotiation. We did not want to sabotage the transaction and knew we needed to acquiesce on one of the three major issues.

To get to the finish line we ultimately agreed on a $14 million valuation and 40 percent cash at closing. Neither side was totally happy but both sides believed it was a fair compromise. Other minor issues were openly discussed and resolved, to a mutually satisfactory outcome.

What we also built into the agreement were three critical additional items.

1. The earn-out (buyout) term would be five years instead of four years, giving the buyer additional time to pay the remaining 60 percent.
2. A contingent agreement clause, that if the net revenues decreased by more than 20 percent in any year the buyer will be given a sixth year to fulfill the final payment.
3. A contingent agreement clause, that if net revenues increased by more than 20 percent after year one of the earn-out the valuation would be increased to $15.3 million, from $14 million, which would be a win-win for both seller and buyer.

The negotiating objective should be to create “value” for the long term by implementing a transaction price and terms that are satisfactory for all parties.

Value isn’t necessarily only financial dollars received initially. In an M&A transaction, the amount of the down payment at closing is always an immediate issue. The seller wants as much as possible at closing since it’s non-refundable and not subject to a clawback. It’s money in the bank, guaranteed.

The buyer wants to pay as little as possible at closing in that is the financial risk of the buyer. If the seller doesn’t meet up to the expectations of the buyer she/he cannot change the deal. So, we attempt to use precedent, the industry standard in determining the percentage of Valuation paid upfront.

There are also other items that may come into play: a shorter term for the earn-out (buyout), a more aggressive earn-out model for the seller, with the potential to earn a larger amount in the future, a shorter work requirement for the seller post-closing.

The percentage and dollars of a down payment aren’t the only factors that can be negotiated. I have had cases where a seller was willing to agree to a lower percent at closing as a tradeoff for working a four-day week instead of five.

We need to explore personal interests as well as business interests, to create a win-win for all parties. One should always pursue a long-term approach.

Suggestions for sellers

Do your homework on your opponent prior to serious discussions. Try to gather information about your opponent, their strengths and weaknesses, their goals and their options. How much do they want your firm?

Prepare extensively and use objective criteria. Have support for your positions, especially if involving valuation. Have expert opinions and documented case studies based on previously published transactions.

Look at your walk-away alternatives. How much do you want this transaction?

Keep egos out of it. The goal is a mutually beneficial transaction. You will be working & collaborating with the buyer post-closing.

Communicate. Without communication, there is no negotiation.

Know your boundaries. Set limits on your most optimistic expectation and your most pessimistic acceptable settlement.

Establish trust. This is critical. You need to trust that your adversary is bargaining and negotiating in good faith, even if major differences in position.

Be flexible. Be willing to agree on tradeoffs

Empathize with your opponent in the negotiations. Be a good listener and show that you understand and appreciate their opinion, even if you don’t agree.

Respect the interests of your opponent and disclose your own interests. Need we say more?

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Rick Gould is Managing Partner of Gould+Partners, a New York-based merger and acquisition consultancy specializing in the PR industry. He can be reached at [email protected].