“He who defends everything, defends nothing.”
Frederick the Great of Prussia (1712-1786)
Frederick the Great was thinking about matters military and diplomatic when he uttered his famous quote. But his wisdom applies directly to successfully negotiating mergers and acquisitions. This is because wise businesspersons should focus their M&A negotiating on the most important deal issues, not squandering time, effort and goodwill by arguing over noncritical points.
The first step is for businesspersons to clearly evaluate and communicate to their advisers what deal points are most important. In the case of sellers, these might include:
- Attaining a certain purchase price
- Negotiating the form of the consideration (cash, notes, earnout, stock, etc.)
- Utilizing a certain transaction structure (stock vs. assets)
- Minimizing the escrow amount and period
- Minimizing transaction taxes
- Closing by a certain date
- Minimizing post-closing legal exposure
- Minimizing post-closing management responsibilities
Without clear priorities, M&A professionals often flounder by attempting to maximize results along every dimension. This bogs down purchase agreement negotiations as every issue becomes a deal-breaker and reasonable tradeoffs cannot be made.
One of my most effective negotiations was working with a Cleveland law firm to sell an ailing 75-year old man’s company. Our client’s priorities were (1) a fast close, (2) all consideration in cash, (3) no escrow and (4) no post-closing legal exposure. With these guidelines in mind, the attorney and I negotiated from letter of intent to closing in just 40 days … for all cash, with no escrow and no post-closing exposure. The price was 10 to 15 percent less than what might have been otherwise attainable, but this was irrelevant to our satisfied client.
Just the opposite happened when a multinational buyer purchasing a business did not provide negotiating guidance to its counsel. As a result, the attorney prepared a one-sided purchase agreement. We asked, “If you represented the seller, would you allow your client to sign that document?” He responded, “Of course not. But I have to have aggressive positions on all points.” Though the deal did eventually close, both sides haggled for four long months. This resulted in the buyer almost losing the deal, paying a stratospheric legal bill and foregoing two months’ profits from the business being purchased.
The late John McFadden, formerly president of MTD, was a wonderful man and a model negotiator. He was often able to craft M&A agreements in a single day by sitting down with the other side and stating, “These are the issues most important to me, and those are the issues most important to you. Here are the ones not critical to either of us. Let me offer a global solution that balances all of our needs. Then we will agree to trade off the minor points.” His honesty and directness focused the discussions, often bringing the parties to immediate agreement. People used to haggling about every item looked forward to dealing with him.
I implore M&A principals and professionals to learn from Frederick the Great. Focus your negotiations on the critical items when attempting to make M&A deals.
Mark A. Filippell is managing director at Western Reserve Partners, a division of Citizens Capital Markets.