Negotiation Case Studies: 5 Negotiation Mistakes To Avoid
Strong negotiation skills are essential to success in the small and medium-sized business (SMB) acquisition game. To close a solid deal, you need the confidence to stand your ground and the savvy to maneuver complex and unique situations. No deal is exactly alike, so you’ll need to stay on your toes throughout the process.
What better way to learn effective negotiation strategies than to work your way through real-world deal scenarios? The five case studies below represent some of the most common negotiation mistakes I’ve seen self-funded searchers make. Read through the stories, think through what strategy you might use, and then read on to see how I would handle it.
Key Takeaways:
Be careful about what you disclose to the seller and broker at different points in your deal.
Think through how your current negotiation, especially early on in the deal, will impact all the other negotiations you’ll have to make.
Work to understand the validity of competing offers.
Dating an offer can help you prevent your deal from getting shopped.
Understand when the seller is testing you and when it’s wise to give in.
Use your first visit with the seller to your advantage.
1. Share Too Much Information
The Story
James is a self-funded searcher. He has been looking for a deal for 9 months and finds a great landscaping business for sale in a nearby city. He uses his model to value the business and adjusts a template LOI to craft an offer. He sends the offer to a buddy who has been doing deals for some time and asks him, “How should I communicate to the seller that the deal must be structured this way because I’m using an SBA loan?”
The Options
James should:
A) Write a paragraph in his LOI that clearly states his intention to use an SBA loan which requires 10%/25% equity or seller note—because this is all about transparency.
B) Not mention anything about the SBA and just structure the deal in the way the SBA requires.
C) Let the broker know he’s using an SBA loan so the broker can tell the seller before the LOI is even written.
The Best Solution
C) James should not mention anything about the SBA and just structure the deal in the way the SBA requires.
I’ve seen LOIs with long paragraphs explaining SBA structure, but this approach can impact how the seller sees you. The broker and seller want the buyer with the biggest pocketbook. They don’t want a contingency of people that need to agree for the deal to close. They’re probably already aware that you’d need funding and might be using the SBA. When you start adding language like “my investors” or “because of the SBA,” the broker wants to talk to the investor instead of you.
In general, be careful about notifying the seller or broker about other people involved in your deal. You’re doing the deal. Communicate it that way.
While it’s important to build trust with the seller through transparency in your deal, at the point of writing your LOI, you don’t know the seller well. You may have spoken on the phone, but they don’t have a reason to trust you yet. They are still trying to figure out how capable you are of getting a deal done, so introducing uncertainty at this point can create some friction.
2. Misread The Auction
The Story
James sends in his LOI on Monday. On Wednesday, the broker calls and says, “James, we really like your 4x offer, but we just received two LOIs from other buyers. One was a strategic buyer who had a higher offer, but the seller is concerned about the buyer firing his employees. The other offer was from a PE group that is about $900k higher than you. The seller really likes you and sees a lot of himself in you. But James, to win the deal, you need to bring your offer up about a million dollars. And the PE offer expires Friday. So, you’d have to get your revised offer in by then.”
The Options
James should:
A) Call his bank and see if he can get pre-approved for a higher amount to cover the additional $1 million
B) Put the new price into his financial model and see if he would still be able to get the IRR/return he needs at the higher price
C) Call the broker on Monday to see if the deal is under LOI and if not, re-submit his offer
The Best Solution
After doing this for 10 years, I’ve noticed that about 80% of the time I submit an offer, the broker comes back and tells me there are two other offers. And they’re usually a strategic buyer and a PE group.
As a younger or more inexperienced buyer, you might not recognize how incentivized the broker is to boost the price. Not only are they tasked with maximizing the price of the deal, but they also get a percentage of the sale price. That puts you in the position of trying to understand how many of these competing offers that come in around the same time as yours are actually real.
Sometimes buyers like the deal too much to step back and think about it objectively, but you should always check the broker. Ask detailed questions like “What’s the working capital pay in the other offer?”, “How long has the offer been in your hand?” or “Is the strategic offer local or from another state?” Really dig down into the other offers to see if you can discover their validity.
Also note that in this game, deadlines are seldom set in stone. These deals will change a lot in the seller’s life so they are willing to take some time to land on the right one.
At this point in my career, I almost always choose Option C and call the broker on Monday after the supposed deadline.
3. Evergreen Offers & Getting Shopped
The Story
James thinks to himself, “Glad I didn’t fall into that fake auction trap.” He re-opens his offer to check it one last time, and he types up an email to send to the broker. He thinks to himself, “What is the best way to be sure my offer is not shopped? How do I make sure that now that I see value in this business, the broker won’t call all his buddies and have them make offers?” James is quick on his feet. He adds the following to the offer…
The Options
James should:
A) Offer a price that is 10% higher if the seller signs within 5 business days or a 10% discount if it takes them more than 5 days.
B) Date the offer and say it’s good for 3 days.
C) Add nothing to the letter, but call the broker and have him tell the seller that the offer is only good for 3 days and then he’s moving on.
D) Tell the broker he’s executing a roll-up strategy. With two other companies already under LOI and a month into diligence, for him to put this deal together, he needs an answer in 3 days.
The Best Solution
B) Date the offer and say it’s good for 3 days.
Date your offer. Although no one will jump because you said 3 days, it sets the expectation that the offer won’t sit forever. Option C is just a passive version of this. It’s better to be more direct by putting this stipulation in your offer.
Option D can work, but you have to be careful because it cuts both ways. In one way, it implies that you’re well-capitalized and already have some deals under LOI. It brings that social proof mentioned by Robert Cialdini in his book Influence. The problem is that the other deals add a sense of risk to the transaction for the seller. They don’t know how those other deals closing or not would impact this deal. Keep in mind that this is a potential outcome.
Option A is not that valuable to the seller and can be an amateurish move.
4. Mix-up Issues With Price vs. Issues With Structure
The Story
The seller debated for 3 days and then called James and said, “I am verbally agreeing to your offer, but I can’t sign the offer until you come to see the business in person.” James goes. During dinner, the seller tells him that he is excited about the next stage in his life where he can retire. He talks about his best friend who sold a very similar business for $5.7. He mentions the number again, and again, and again. James asks himself, “Does he not understand that my offer is for $4.7 million? And the number he keeps reciting is $1 million higher?” James wants the deal so he sharpens his pencil.
The Options
James should:
A) Do nothing – keep the offer where it is and ignore the signal that the seller made with the $5.7 million mentions.
B) Call the broker and say companies in this industry trade at 3.8 – 4x. The $5.7 number is a 5x and unreasonable.
C) Add a million dollars of seller note to the offer and resend.
The Best Solution
Before we get to the best solution, let’s look at what’s happening here.
First, the seller wants to compete with his friend who sold a similar company. For no other reason than being able to say he sold his company for more, he wants to increase the price. This is what we call a “Country Club” number.
Second, the seller is testing the buyer. Recognize that a dinner with the seller is really like an interview. They’re trying to understand how malleable you are and whether you’ll be able to successfully lead their business once you take over. Will the business that they invested so much into continue to succeed? Will they get their seller’s note? Bending over backward for the seller at this stage might not be in your best interest.
Lastly, there’s a general difference between price and structure. Think creatively about how you can satisfy the seller.
In this case, if you like the deal, the best solution would be C. Add a million dollars of seller note. You don’t want to give it up too easily, and maybe also pair it with a $100k decrease in the working capital. By doing this you’re essentially giving your seller their “Country Club” number without changing the deal fundamentally. It is also a relatively safe option to sweeten the deal.
Option A is also fine. Sometimes you just need to stand your ground. If the seller had you fly out to go see him with this other number on his mind, giving in could also put you in a precarious position with the next 20 negotiations that will come up through due diligence. Think about how the current negotiation will affect all the others. When you start allowing people to push you, that changes your position and power in the deal.
5. Under-utilize The Company Visit
The Story
James flew Southwest because he considered staying longer if he really hit it off with the seller. He flew in, had a meeting, and is finishing dinner. He really likes this seller and this business. He planned on going straight to the airport to go back home, but he’s considering staying extra time. He thinks to himself, “What additional value could I get from an extra half-day visit that could make my buying process better and my relationship stronger?”
The Options
Be creative! Think through how James could get more out of this trip.
The Best Solution
Use the visit to really check things out. Remember that success for self-funded searchers looks like putting up your personal guarantee, your house, your car, probably your family, and definitely your mental sanctity. If the seller is lying or if the business is not what it seems, it could put you in financial ruin. This visit is your chance to get ahead.
Since you already cut the check to go visit, you might as well make the most of it. Here are some ways you can use your visit wisely:
See if you can get a site visit. Sometimes the seller might not have told their employees that they are selling, so it can be difficult to get in during business hours. That’s another reason why you shouldn’t rush to get home.
Talk with people who know the business like competitors, suppliers, or customers.
Drive around the facility. See what time people are coming in or how many trucks are coming and going.
If you only get one meal and an hour of questioning, you won’t really get to know the seller. Plus, the cost of staying a bit longer is only incrementally larger than what you already invested to come visit. I’d encourage you to do a two-day visit. Have lunch on the first day and let them tell you what they want to about their business. Talk about whether they want to invite their spouse to dinner that night. The spouse can have veto power over you, so you want to get to know them. This can also set you apart from other buyers who won’t think to do this.
Stay the night and get breakfast with the seller the next morning. The seller is definitely going to be talking to their spouse about how the previous day went, so you might be able to get more details. It also gives you another chance for a site visit. If you part ways, you can also drive around and get to know the area more.
Underutilizing your site visit can impact your positioning in the transaction and doesn’t set you up for successful negotiations. The first time something goes sideways in diligence, it’s helpful to have a joke or story to fall back on from your meeting. Bring up any human moments that might help bring the seller back to a reasonable transaction. If the visit is brief and rushed, you’re more likely to get brief, rushed activity in your due diligence process.
Let’s Talk Through Your Deal!
By mastering the art of negotiation, you can increase your chances of securing a favorable deal and making the most out of your investment. If you’re new to the SMB acquisition landscape, you might benefit from working through your deal with an expert. The earlier you take this step, the better prepared you’ll be.