For mostowners of privately-held security guard companies, the business represents themajority of their net worth. Therefore,the quality of life during retirement, the next investment venture, or therelief from some financial burden depends on the price they receive when theysell their business.
Theystarted it and nurtured it. It’s almostpart of the family. There can be nomistakes that will keep them from getting top dollar. Their future depends on it.
However, consummatinga transaction becomes less likely if the sellers begin the sale process withthe mind-set that in order to get maximum value they always have to be one-upon the buyer on every negotiating point. If the buyer offers five, the seller counters with eight, and pushes thenegotiations to the limit – variously called “over-negotiating”, “reaching thewall of resistance” or “going for the last dollar.”
Throughout thenegotiations there are many points upon which an agreement must be made. In a typical transaction there may be over100 negotiating points. Some have largeconsequences to one or both sides. Others have little effect, but nonetheless must be resolved.
Sellers who act ontheir own, without benefit of advice from thier negotiating team (which we willdiscuss below) are more than likely to over-negotiate since they are proceeding from emotions attached to their business.
A likely scenario would go something likethis: the seller at the outset of thenegotiations asks the buyer to increase the offering price by 2%. To the buyer, this is probably not a largeconcession because the increased price still meets its financial modelparameters – so the buyer agrees to it.
Then later in thedeal, the seller asks the buyer to increase the down payment by 10%. The seller is inclined to make this requestbecause the buyer already moved without much resistance on the price, and sendsthe seller a signal that there are still concessions left on the table. Again, to the buyer this is not by itself alarge concession, it’s agreed to because it still fits within the parameters ofthe financial model.
After the buyer makestwo concessions, the seller asks for another, seemingly small concession. But this time, the buyer does not agree withthe seller’s request. This confuses theseller because the request seems insignificant. However, what the seller does not realize is that the lastrequest, when taken with the bundle of concessions to which the buyer hasalready agreed, makes the buyer re-examine its financial model. All the concessions, when considered as abundle, result in a serious deterioration of the return on investment. This forces the buyer to reconsider thereason for wanting to buy the company in the first place.
If the seller islucky, the buyer will stay with the negotiations and eventually renew interestin the company. This usually comes atthe expense of the seller having to give back some of the previous concessions. Or worse, the buyer may lose interest and nolonger want to buy the company. Thebuyer sees the seller’s pattern of always trying to better its (the seller’s)side of the deal as the seller not being motivated to sell, or unwilling tonegotiate in good faith, in which further negotiations would be a waste of thebuyer’s time. Thus the seller actuallyloses some of the financial advantages previously negotiated, or loses the dealaltogether – all because of the narrow focus of having the last dollar.
Prudentsellers, those who need to sell or recognize that the deal at hand isunprecedented, will learn which points are really important to its interestsand which are not. They will recognizethe items that are necessary in getting these points, while at the same timenot over-negotiating and throwing the deal off track. In other words, they’ll “pick their battles” to stay focused ontheir ultimate objective.
Sellers need to knowwhy the buyer is interested in the seller’s company. Knowing this will give sellers insight as tojust how far they, or the members of their team, can push on some of the negotiating points. For instance, if the buyer has a nationalaccount that represents a large percentage of the buyer’s total business thathas requested service in an area not presently served by the buyer, butserviced by the seller, then the buyer would have a strong interest in theseller’s company. It needs the seller’sinfrastructure in the area to provide service to the important customer’ssites. Within certain priceconstraints, it’s more economical to purchase a company than to try to buildbusiness in a new area.
Also, if the buyer iscontemplating an initial public offering, the additional volume may enhance itsoffering value. Or the buyer may needthe seller’s expertise in certain areas of security, which may make the buyer’smarketing efforts more attractive.
Sellers need tounderstand the importance of the buyer’s financial model. This model serves asa measure for the buyer’s return on investment. It is the reference point for the buyer’s decisions, and isusually prepared before the parties enter into serious negotiations.
Its starting point isthe information furnished by the seller. The information is then adjusted to reflect the way the buyer intends tooperate the company, the end result being the buyer’s profit model. The buyer usually does not share the modelwith the seller; to do so would obviously give the seller undue negotiatingleverage. From this model, the buyerformulates its maximum offer, again based on the buyer’s return on the price itexpects to pay the seller. It’simportant to note that the model is often imposed by the company’s board ofdirectors or investors, and thereby limits the authority of the buyer’snegotiating team on certain issues. Asthe seller’s demands push the terms past the limits justified by the model,and/or increases the buyer’s risk in the transaction, the buyer becomes lessinterested in going forward with the deal.
Sellers need tounderstand the buyer’s negotiating style. Proactive buyers develop a negotiatingpattern. There are buyers who say“this is my final offer” and mean it. Then there are those who use this comment as a starting point fornegotiating. Some start low on everyissue, then through protracted discussions allow the seller to negotiateupwards, and thus give the seller a sense of winning or reaching a limit.
Some buyers waste notime in getting their best deal on the table. They are usually on the fast track for acquisitions. They know the importance of keeping themomentum and not letting sellers have time to get interested in other buyers. This type of negotiating confuses sellers the most. The buyer gives in to all the seller’scounterproposals in order to get to the bottom line quickly, which makes theseller believe that the buyer’s interest in the company is stronger than itreally is. This usually leads theseller to test the limits by searching for the buyer’s point of resistance, anaction often perceived by the buyer as a seller’s lack of motivation, whichwill cause a serious buyer to walk away.
Obviously knowing thebuyer’s style would help the seller in deciding just how far to go beforereaching the wall of resistance. Butbuyers don’t come to the negotiating table wearing identifying labels. The seller who acts alone or withinexperienced advisors is not going to be able to read the subtle (andsometimes not so subtle) signs that reveal the buyer’s negotiating style.
But how do thesellers know a buyer’s motivation for wanting the company, the pricing model,and negotiating strategy? How do theyknow what’s reasonable and fair, and whether they are getting a good or even anunprecedented deal? After all, theseller is a security guard company owner, whose skills are in running andbuilding a company, not in selling it.
First of all, sellersshould look within themselves. Theyshould try to think like the buyer, putting themselves in the buyer’sshoes. Would they consider their owndemands as reasonable? Since the selleris emotionally involved in the process, this type of thinking becomes verydifficult if not impossible to accomplish.
Therefore, a prudentseller will rely on the expertise and skills of their negotiating team –accountants, attorneys and deal manager (intermediary) to get through the oftenemotional, and always complicated maze of factors toward consummating atransaction. Before seriousnegotiations start, the owner will counsel each team member to make sure theprofessional understands why the seller wants or needs to sell, and theconsequences of not selling – a very important consideration when making surethe deal does not jump off track by someone over-negotiating.
The attorneys andaccountants
Often sellers talk totheir accountants and attorneys first when they are thinking aboutselling. They are the ones who havelooked after the legal and financial affairs during the operating years of thecompany. They are usually more thanjust advisors, they are trusted friends.
However, the legaland tax ramifications of selling a company are very complex and requirespecialized knowledge. If theseprofessionals, with whom the seller has built a relationship, do not have thisexpertise, they will not be the most appropriate advisors for the sale. When this is the case, they should recommendsomeone within their firm who specializes in these matters to take the lead inproviding counsel for their client. Ifthere are no specialists within the firm, the accountant or attorney shouldseek a specialist from another firm to help them.
These professionalswill be knowledgeable in contract law as it relates to selling businesses. They should proceed in the negotiationsalways with their client’s best interests in mind, which means they mustconstantly weigh the consequences of over-negotiating against looking after theclient’s legal position. They shouldnot make large issues out of positions of less important legal consequences totheir client.
They will seek advicefrom the deal manager on how far they should push on issues. They will explain the consequences of thelegal positions to the client/seller, then let them make the decision. After all, it’s ultimately the seller whohas to suffer the consequences of a failed deal.
The Deal Manager[Intermediary]
The seller will usually have spent lesstime with the deal manager than the accountant or attorney. By definition, the deal manager is usuallynot needed until the owner gets ready to sell, although the prudent owner willhave established a working relationship with one long before the anticipatedday arrives.
The experienced deal manager will havemanaged many deals in the security guard industry. He’s in contact with people in the industry daily; it’s hisbusiness to know the current market conditions and valuations forcompanies. He knows when a securityguard company has been sold, and usually the price and terms – even if it’s adeal he didn’t manage. He will knowwhether or not the seller’s price is good or bad and whether the terms are fairwhen compared to these industry transactions. His advice on the standard for selling security guard companies will bethe benchmark the attorneys and accountants use to keep fromover-negotiating. The deal manager alsoknows how to read the buyer’s negotiating signals. He then alerts the parties on the seller’s team when they arereaching the buyer’s wall of resistance. Chances are he has already consummated one or several transactions withthe buyer, so he knows what to expect and just how far to push on certainissues.
If he’s really looking after his client’sbest interest, he will advise the client against going after minorconcessions. Often this advice is notwell received by the client, who perceives this as the deal manager wanting aquick deal and not looking after the company’s best interest.
In giving thisadvice, the deal manager knows that the buyer considers the entire bundle ofconcessions when evaluating a transaction. Unless the concession is very important to the seller, he should leaveit alone. It may be just the culpritthat tilts the scale, and causes a good deal for the buyer to turn into amarginal one at best, which may turn into a “no deal” for the seller.