When navigating negotiations related to acquisitions, it is important to work toward a solution that is amenable to all parties. However, companies often find themselves “stuck” on certain factors such as valuation. The Negotiating Matrix offers a systematic approach that can help ensure your achievement of the best outcome without losing sight of your primary values.
In a prior IOI Partners article, I laid out some common mistakes made in negotiations and proposed the Negotiating Matrix as a useful tool to help guide negotiations. This matrix is focused on:
- What do we want?
- What can we give?
- What do they want?
- What can they give?
In this article we will look at two examples as to how a negotiation was able to move forward after getting unstuck over valuation, particularly around “futures.”
Stuck on Value #1
The seller of a small privately held company had higher expectations for the value of their business based on some “futures” which still needed to be proved out. The buyer, being a large public company, was concerned about not overpaying for the seller’s core business and did not place the same value on the “futures” portion of the business.
Rather than get stuck on value, the buyer proposed to buy the core business for a fair multiple and had the seller create a Newco in which to hold the ‘futures’ assets. The buyer took a 20 percent stake in Newco plus a right of first refusal on the remaining shares. As a public company, the buyer was concerned by the potential negative effect on their earnings if Newco was consolidated with their operations and consequently wanted to avoid having significant control over Newco. The buyer could give up control over the futures because their focus was on the core business. The seller could get a second payday if their “futures” panned out as they expected and achieve the value they wanted. As a private company the seller didn’t care about the negative impact to earnings from investments being made in the futures so this was an easy give.
It turns out that the “futures” were quite valuable and the buyer eventually acquired all of the shares of Newco after the seller demonstrated the new technologies and secured the patents. While the buyer paid more overall, they were able to manage their risk of the new technologies.
Stuck on Value #2
The seller of a small privately held company had higher expectations for the value of their business based on some new products which had recently launched. The buyer was concerned about not overpaying given that there was insufficient market acceptance data on the new products.
The parties agreed on an earn out which put a significant portion of the value at risk for the seller based on the performance of the new products.
The parties eventually truncated the earn out as it was getting in the way of what was best for customers. The buyer paid more than they wanted but gained complete control over the customer sales and support process. The seller got less than they would have if they had achieved the top end of the range of the earn out criteria, but because they were going to become leaders in the buyer’s organization and wanted to advance their careers they accepted less. The earn out extended for more than two years, which can lead to trouble in a dynamic business as market conditions change.
When stuck on valuation, look at the elements that are causing the disconnect. Examine what the seller can give and what the buyer wants for opportunities to negotiate a solution that will work for both parties. Avoid earn outs covering more than a year if you can.