Background: Negotiations are a part of life, whether it is in business or in the political arena, whether it is in selling a company or buying a stake in a business or raising venture capital for your company. In the last week of sessions of the MPWE 2009 at IIMB (Management Programme for Women Entrepreneurs) we had a negotiations role play for purchase/sale of a business. The participants were divided into 8 teams, 4 representing the buy side and 4 the sell side. We therefore had 4 sets of negotiations. The learnings of this were so good that I wanted to share this with a larger audience.
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Rules: The rules were simple; a one page sheet of the case was given to the participants with a background of the company being sold as well as a sample set of companies. This was to help them arrive at a valuation range, prior to the negotiations. The groups were also given initial preparation time to plan and decide on their negotiation strategy.
The 8 teams were instructed that they had to close the deal within the given time. They were also told that they had to really feel the part of the buyer/seller side and had to get into the role. The idea was to simulate a real life situation in a limited time period.
Analysis: It was interesting to see the different permutations and combinations that came up regarding the sale price and deal structuring and the post deal plan. Three deals were struck, and the fourth set could not agree to a deal price in the time available. There were variations in the negotiating strategies and the deal price, however, some points were common across the eight groups and below are the key takeaways:
- The fact that different persons negotiated differently came across very clearly. Some teams were able to take leading positions early on in the game, because of the way they took control over the whole process.
- Negotiations are the starting point, many times if the deal goes through; the two sides have to work together in the future. It is therefore important to avoid getting into personal traits and offensive or overly aggressive stances. If one party feels it has been cheated or perceives unfairness, this will impact the future working of the combined entity, if the deal does take place. Therefore, it is important that the two parties realize that they should not perceive this as a battle with two opposing sides, but rather as a joint work to come to some agreement which is seen as fair to both parties.
- Ultimately, the teams are made up of individuals and people may be sensitive to different things. Negotiators need to be aware of the signals sent out by these individuals. Negotiations is about understanding or attempting to understand the needs of different people, in your team as well as in the team on the other side.
- If team members of one group disagree in the meeting or give conflicting views, this can lead the other party to suppose that there is some problem to be addressed and can directly impact valuation and deal structuring. Thus teams need to be careful about what messages they are giving out, in their words as well as in their actions.
- Sometimes, giving the other party a few options helps. Some examples: taking a certain percentage upfront for a certain value, taking some money now and some later, an option of keeping a board position, or an option to change the management of the company such as the CEO and CFO.
- Sometimes news flashes about the business and industry are received and can change the whole tone of the negotiations. In the role play, there were two interruptions which announced some changes in the business and environment. These influenced the negotiators and the deal structuring changed as a result. For example, at one point, the buyers were given a message about a rumour that there could be a disagreement in the key team of the sellers. As a result, in one deal, the buyers decided to bring in a change of management and a part of the deal money was brought in as a severance package to the CEO of the selling company.
- The side that was more prepared came out of the deal stronger. They went prepared not just with a valuation range, but also with a list of questions and answers to questions that they could be asked. These related to the company, the business and industry environment and the future plans post the deal, if it did go through.
- Despite this being a simulation, for a period of time, participants actually felt that they were buying or selling a business and they felt pleased when the deal was finalized. This is of course to the credit of all participants who went into this role play with all seriousness and the outcome showed this. Many times, human emotion influences us to work towards deal closure, even though the financial aspects may not be very favorable. We need to be conscious of our emotions in addition to the financial and business aspects.
- One of our participants summed up this set of sessions very nicely. She said, prior to this excercise, I thought I could just value my company and go out and raise funding for this, by offering an equity stake at a certain price. I now realize it is not like say …one trying to sell something at a certain price point. There are many dimensions to sale/purchase of a business and negotiations play a key role in the price we can get.
Conclusion: At the close, we summed the learnings and contrasted what happened in the 4 different sets of negotiations. The participants opined that these learnings and negotiating insights could help them, not only in instances where they had to sell a stake in their company or raise capital, but also in other negotiations such as transacting with a customer or a buyer.