The merger that looked good on paper comes undone at execution. Staff, who were the future of the new firm, leave in droves; clients are unsettled and anticipated earnings shrivel.
What went wrong with the negotiations?
Negotiation is all about closing the gap between the opening positions of the two parties to ensure that both parties, with some give and take, get a good deal.
Know your variables
Upfront and behind closed doors, work out your variables – your ‘wriggle room’ in the deal:
- What proportion of the combined entity do the members of your firm need? What is the mechanism you propose for dividing the equity?
- Who will retire and who will deliver future value and how will each group be rewarded?
- What roles/responsibilities/geographical mandates will your people agree to going forward?
- What is your proposal regarding combined firm hierarchies?
- What is your proposal regarding properties?
- How will client conflicts be managed?
- What mechanisms do you propose for shareholders looking to exit post transaction?
This is just the starting point there will be many more variables when you take the time to consider them.
- Listen to what the other firm wants. Identify what is important to its stakeholders and structure a deal that incentivises them.
- Share the ambitions of your people so the other side knows how to incentivise you.
Identify your deal disruptor
Is there someone within your firm who could scupper the entire deal with impossible conditions?
- Identify how much influence your deal disruptor has.
- Devise a strategy to manage your deal disruptor during negotiations.
It is usually best to get your deal structure on the table first. That way, you start from your preferred position and the other party is obliged to move towards it, rather than the other way around.
You should, however, leave room for manoeuvre. In professional services firms, where decision-making can involve multiple parties, it is important to be realistic not overly aspirational in your opening bid.
Nitty gritty of deal making
- Give the other side time to respond and then come back with your counter proposal.
- Try to negotiate the transaction as a whole, rather than individual elements.
- Have one principle negotiator to maintain an overall view.
- Summarise the points agreed, in writing, using ‘heads of terms’. This ensures that cross-purposes are sorted out swiftly.
- A good negotiator does not make threats to walk away if all concessions are not met.
Go for the win:win
To be successful, each side must be content with the results of the negotiation. Any festering ill-feeling will be bad for business once the deal is concluded and two parties become one.
Acrimony can be avoided by using your advisers to take the heat out of disagreements and to backtrack on your behalf without you losing face. An adviser can also help with communications, maintaining deal momentum and ensuring that best value is preserved for both parties in the transaction.
The day the transaction closes, the hard work of bringing two firms together begins.