Liquidity events represent the final outcome in the entrepreneurial journey, and they are few and far between. In today’s financial climate, IPOs are highly unusual, and the most likely path to liquidity is via an acquisition. The acquisition process is complex and highly stressful, even if you’re one of the fortunate few companies where multiple organizations are competing to acquire you. The process of negotiating this type of a transaction, with all of its intricacies, is time consuming and complex, especially on the CEO. Some CEOs are natural negotiators, and some aren’t. In any case, the “art” or “skill” of negotiation is important whether you’re negotiating the acquisition of your company, a big product sale or your own salary.
For some sound, timeless advice, I again return to George Von Gehr’s new book, “The Effective Entrepreneur: Fifty-nine rules to Create Value Throughout the Life Cycle of Your Company” (Amazon Link) and, with permission, reprint here Rule 30. Here’s George’s background in a previous post.
George has a series of five rules on the topic of negotiation, so I thought I’d offer them on this blog over the next few weeks.
“Whether hiring personnel or selling the company, your negotiating strength and position are determined by the nature of your next best alternative. In a sense, this establishes your minimum or maximum values for that negotiation. What is important from a company management point of view, is to establish a satisfactory backup alternative and then to understand its worth in the context of the negotiation.
Contrary to conventional wisdom, negotiation is not necessarily a zero sum process. Knowing what things are most important to each party is a critical part of the artistry. Negotiators often seem to want everything — even things of little value to them — just to demonstrate their macho strength. Therefore making “trades” is an essential part of the process, permitting both sides to receive suitable value and to feel positive about the outcome.
For a negotiation to be effective, conferring in advance with your board and /or with internal management is necessary in ordre to gain their support for the outcome. A carefully constructed negotiating strategy also allows a measure of victory for the other party so there will be support for the deal on the other side as well”.
Knowing when to hold ‘em and when to fold ‘em can make the difference between a good outcome and a bad exchange. And having another alternative, so you that you’re not forced to accept a deal, is critical to your negotiation strategy. Your alternative may be to “do nothing” and run the company profitably or it may be to raise more capital to make the company a success on its own. So take time BEFORE you sit down to negotiate to listen, learn and confirm—objectives of your own team, as well as the primary goals of your counterpart. Understand your alternatives. Getting to yes requires a keen understanding of what yes entails, and the patience and creativity to assemble a package that resembles closely enough that which will satisfy the many players whose assent is essential.