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Dealer's Choice: Before negotiating a successful M&A deal, know what you want and what you will do when the other player shows his hand.
Leader's Edge, October 2008
Fast Focus
- If you gamble on M&A, negotiating skill will help you beat the odds.
- Three Ws are the secret to successful negotiation: wish, want, walk.
- The biggest weakness is not realistically assessing the market and therefore not arriving at a place where the market can meet your want.
Negotiations have a lot in common with gambling. That comes as no
surprise to any of the industry titans meeting this month in Las Vegas
for The Council's annual Insurance Leadership Forum. I'll be there, too,
snooping around for the back-room deals and evaluating the negotiating
techniques of those high-powered dealmakers at the insurance world's
biggest networking and deal-making event.
Vegas is the perfect place to hold this gathering. You can go straight
from betting the farm in a high-stakes card game to betting the ranch in
a high-stakes M&A—and do it again the next day…or just continue
the pattern on a 24-hour cycle.
While I will miss the familiar setting of the Greenbrier (where I knew
where to go to see deals being put together, find out who was in play,
and scout out who was talking to whom), there is surely no better place
in the world than "Sin City" to talk about negotiating and deal making.
So this month I want to reveal my negotiating secrets—or at least
some of them.
It's not like a system of counting cards where you know what the dealer
will throw down next. Or, then again, maybe it is. There is a definite
method for successful negotiating that will get you out of that back
room feeling flush enough to hit the high-rollers table off on the
fringes of the clanging casino floor. In M&A, as in Vegas, it's more of
a sin not to know the system and fail to plan for it than it is to play
the game.
Learning to Fly
I am one of the lucky ones, and I'm not talking about craps. I was lucky
enough to work for one of the largest firms in the world, which not only
laid at my feet a boatload of M&A activity and responsibility, but also
ponied up regularly for my continuing education. On their dime (many,
many of their dimes), I attended annual training sessions on how to
negotiate, and I learned from some of the best professionals in the
field.
I have said this before, but it's worth repeating: A career in public
accounting may not be for everyone, but it's a great training ground.
The experience I gained from my 13 years there was incredible, and I
wouldn't trade it for an inside straight. Along with being paid
relatively well, the commitment to ongoing professional development was
an aspect of that work that has served me well ever since.
So I'm lucky. Combine the luck with that negotiating training, and I
became—if I do say so—a good negotiator. Since much of what
I do, and what most insurance professionals do, is sales, it's obvious
how critical good negotiating is to a person's success. But to this day,
I am amazed at how few people are really good negotiators. How they got
to the positions they hold while lacking basic skills is somewhat of a
mystery.
So pull up a chair and let me readjust my green eyeshade and whisper to
the pit boss. We'll get the chips flying.
First, you must own up to the fact that you think you're the king of
deal making. Don't deny it. You have to have this confidence to be
successful. However, at one point or another, we've all probably also
had these thoughts:
- Unsure of our position going into a negotiation
- Felt beaten up or abused after negotiating
- Felt we could have done better or that we left something on the
table.
By the end of this article, I hope you will walk away with some basic
tips that will elevate your negotiating skills and make you better able
to avoid those feelings.
Here's the big reveal. Over the years, I developed a very simple method
to negotiating based on three Ws: I have my "wish" list, I know what I
"want," and I know what will make me "walk."
Imagine my surprise when I was recently browsing through an airport
bookstore and I came across a book called Fearless Negotiating: The
Wish-Want-Walk Method of Reaching Agreements That Work, by Michael C.
Donaldson. This book, written by a very successful entertainment lawyer,
takes the concept I use to the next level. So with the utmost respect
for Mr. Donaldson (were we in the same seminars during my KPMG period?),
I will share some of the negotiating ideas put forth in the book.
Strategy by the Ws
The Wish-Want-Walk strategy is almost as simple as it
sounds—simple to understand but, as with many things, not as easy
to carry out. Here are the basics:
- Wish. Set a goal for the negotiation. Make it your dream, your
best-case scenario.
- Want. Lay out a realistic assessment of where you think the
negotiations will end up, based on market forces.
- Walk. Draw a line, across which you will not step. Know what the
numbers or terms are that will cause you to simply walk away because the
deal will not be worthwhile.
Most people don't start this planning process early enough. Many will
say, "Let's see what the other side has to say," before sitting down and
beginning to map out a strategy. Candidly, I have never heard of a more
ridiculous approach. Actually, it amounts to no strategy at all.
Here's what happens if you don't set your Wish-Want-Walk ahead of time:
- You let the other side set the tone and define the negotiations
field;
- You lose the ability to respond quickly because you have so much to
consider; and
- You lose the freedom and flexibility to plan your future without
being influenced by the other party.
Now, who would want to go into a negotiation with those handicaps? Just
as you wouldn't step up to the Vegas gaming tables without knowing the
rules and knowing when you're hitting the rent money, surely you also
wouldn't lay your company's future—and your own financial
future—on the line without having a strategic plan ready.
Consider this: Most of my deals are DONE before I ever receive my first
letter of intent. My use of Wish-Want-Walk and getting my clients to buy
into the strategy has produced some incredible results. When you've done
your spadework, the outcome is predetermined before the first offer is
on the table. Many times, my clients will say, "Wow, we barely had to
negotiate," but that's only partially true. We've essentially done the
negotiating internally, hashing out among ourselves what will be
acceptable terms.
Here are the advantages of having my Wish-Want-Walk in place before
shaking hands with the first hello:
- I define the negotiation ahead of time;
- I get to go first and lay out exactly how I want things to unfold
and move forward; and
- My client has already bought into the strategy, so there is no
second-guessing.
Let's delve a little more deeply into each of the stages.
When You Wish…
In the wishing stage, imagine that you only had to negotiate with
yourself. You would not find too much difficulty in reaching an
agreement.
Me: "I want it all!"
Me: "OK, where do I sign?"
This is the place to lay out your dreams and postulate the numbers and
terms that would make you say "Wow!" We all need this wish—it is
what we're working toward.
I compare the wish to the vision in strategic planning. It's the goal we
hope we can achieve. Yes, it is a stretch, but it is where you let your
mind soar, the big, hairy audacious goal that would fulfill your dreams.
In this phase, it's OK to wear those rose-colored glasses and carry a
Pollyanna attitude. Don't set boundaries. As Donaldson says, this is
where "fearless negotiations" start.
Earth to captain: Gravity is still in effect. You must have the facts,
market data and other substantial points to support your wish. I like to
say that the wish is the best I could hope to achieve if all the stars
align perfectly. I won't say that all my deals have resulted in my wish,
but many have come close.
Wishing takes work, too. It means taking chances, but they are
calculated chances. It means exploring all possibilities, thinking
outside the box, being willing to have the person on the other side
think you are absolutely crazy. That is OK because what comes from many
wish lists is a result that would far exceed the want.
As my absolutely favorite children's singer, Shannon Tanner, says to his
listeners (who include my kids): "Dream Big!" (P.S. If you ever go to
Hilton Head, S.C., head over to Shelter Cove and spend an evening
listening to Shannon, and you will appreciate what dreaming big and
having a wish list is all about.) Children know the wish list is a big
dream, and it inspires them to great things. Both of my girls, ages 6
and 8, think they will be Olympic skiers and figure skaters. Who am I to
tell them not to dream? I may not be their coach, but I will be in the
stands, proudly cheering them on.
Donaldson has a great summary of what your wish list should be: He uses
an acronym called SYSTEM, which is:
Specific—Be specific so you know when you actually achieve
your wish.
You-centered—These are your goals and objectives, nobody
else's.
Stretch—Your wish must be realistic but also a stretch, not
easy to obtain.
Time-sensitive—Know when to present your wish, but also
always know when to move off your wish.
Everybody—All parties must buy into the wish. No second
guesses, no confusion, no conflict.
Manageable—Don't have too many wishes. Make your list of
wishes manageable, as that is the most likely way to achieve the key
items that are truly a wish.
What You Want
Hold out for the wish list, but get comfortable with the idea that the
negotiations will often end up in the "want" category. Sometimes it's
better to live in reality. Although you control your wish, the market
really controls the want, so you must understand the market before you
start negotiating. Then allow for deltas plus and minus based on many
things, including your negotiating skills.
What you want is still a number that will satisfy you. The problem most
people make with a want is that they fail to recognize this: No matter
how much negotiating, no matter how strong-willed you are, no matter how
much prep and strategy you do, the market ultimately controls most
outcomes. As Donaldson states, "The marketplace (your want) is the
single most stabilizing factor in negotiating."
It's not quite the Vegas concept of "the house always wins," but it
certainly comes close. Call it "the house always controls the odds,"
replace house with market, and you get the idea. The biggest weakness I
see, either from an advisor like me or from a client, is not
realistically assessing the market and therefore not arriving at a place
where the market can meet your want. If you don't read the market right,
you're in danger of slipping back into wish territory. That's why, when
I do a valuation for a seller, I do not end with the highest, best
value, but rather a range that identifies the market.
When you consider all the factors—amount paid upfront, earn-out,
escrow, non-competes, etc.—you'll see there are many market-driven
things that must enter the valuation. These factors must be balanced
into the want, or as I like to say when my negotiations become bogged
down: "You name the price, I will name the terms."
As a matter of fact, the market is relatively easy to determine. It is
an approximate value of the worth of something. That's actually pretty
easy to negotiate. It is all the other factors that I mentioned, along
with the intangible items—management skill, quality, service,
sales culture, etc.—that result in the price going up or down from
the market.
Finally, understand that the price of the want is also greatly
influenced by risk and reward. The insurance product bears out this
theory every day. Generally, the greater the risk, the greater the
price. In M&A, as your risk tolerance decreases, so does your price.
Buyers and sellers always have a different view of risks, so never lose
sight, whether a buyer or seller, that there will be a variable
perception of risk and reward as a fundamental premise in every
negotiation. It's an ancient rule: The rewards go to those who take on
risks. This rule will never change.
Walk the Walk
Perhaps more so in Vegas, but also true elsewhere, is the old adage that
money talks. If you can't pony up the big dollars, then you are in the
wrong league, right? Well…
I believe that everything has its price, and when that price is
exceeded, it takes more cojones to walk away than overpay. In the words
of a silver-haired showroom headliner, "You gotta know when to hold 'em
and know when to fold 'em. Know when to walk away, know when to run."
Sometimes in a negotiation, the single most effective thing you can do
to create power in your position is to define the walk-away point. When
you clearly resolve to walk away if necessary, you have changed the
dynamic. Every single thing you say and do from the beginning to the end
of the negotiations will be affected.
Establishing the walk-away point prior to negotiations is against our
nature. We want to think positively and expect that the deal is going to
succeed. That's an emotional response. The reality—the
intellectual strategy—is to make a plan so you can free yourself
from the emotional attachment and walk away from a deal that should not
be consummated. Too many deals are done because one party clings to the
emotional attachment well past the walk-away point.
I have actually started many negotiations with my walk-away number. It
saves all of us time and energy, but more importantly, it sets the
baseline. You may not have leverage, but the other party is at the table
because you have something they want. That is worth something, and it
does begin to level the playing field. If you stick to your walk-away,
the other side can kick, scream, argue, reason or use any other method
they want to get you to their number, but they will not get what they
want unless your pre-determined threshold is met. At that point in the
negotiations, leverage shifts, if ever-so-slightly.
Another silver-haired crooner once told Vegas audiences that "no one
knows what goes on behind closed doors." Incidentally, Charlie Rich
wasn't talking about M&A, but we won't go there. After reading about
some of my secrets, you probably do know a bit more about what goes on
behind the negotiation doors. The techniques I've explained here do not
involve rocket science, but they do play off of human nature.
We all want to be successful and feel like we're in charge of a
situation. I can guarantee you that a well planned and well executed
strategy of Wish-Want-Walk will result in the leverage you need to
finalize a successful negotiation, and it will help you avoid truly bad
deals. It will bring you power, allow you to keep your sanity, and help
you eliminate most, if not all, of the emotional baggage that comes with
negotiating.
Think about the situation when you sit down in one of those plush Lake
Las Vegas suites in the desert. Or better yet, plan to try out this
technique when you slide onto a Naugahyde chair at the poker table. I am
pretty sure this strategy will save you a few dollars while in Vegas and
avoid the morning-after feeling of "What the heck was I thinking last
night!" And don't worry about your escapades showing up in a future
edition of this column because as we all know, what is negotiated in
Vegas…
Lieblein is a contributing writer and managing partner of Hales & Co. Rob.Lieblein@
LeadersEdgeMagazine.com
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