This is the 12th of a Series of 15 short articles on “HOW TO BUY THE RIGHT COMPANY” They will be posted at one a week
Perhaps too much has been written about elaborate or indirect negotiating techniques in business situations. At least in the case of acquisitions, I espouse a direct, problem-solving oriented approach. This builds trust between buyer and seller and allows for resolution of key issues.
Thorough understanding of the seller’s motives and details about his or her company and industry will aid your negotiating ability. You should thoroughly understand the prospective company, including the likely risks and potential problems you might encounter if you take over ownership. Further, you should be able to present such concerns in a way that the seller will find believable and will be able to accept.
You may run into a seller whose perception of the company is too different from your own to resolve in negotiation or in some other way becomes unreasonable. For this reason, it is always critical that you keep your lead flow going. This may necessitate having a cash reserve or going back to investors for more money so that you can investigate other leads. Be cautious about holding all your “eggs” in one basket. Keeping your leads flowing will also reduce the chance that you romanticize any one deal. Also keep in mind that there are always other “fish in the sea”. You want to guard against escalating commitment, the phenomenon that you become more strongly committed to the deal just because you have invested more time and money in it. No deal is perfect, but if you really uncover a major concern, it is never too late to back out of a deal prior to closing. It is better to lose the front end expenses than put the entire price in great jeopardy in a business that is headed for serious trouble.
Reference: “How to Acquire the Right Business”
by John Psarouthakis and Lorraine Uhlaner