The Dealmaker’s Playbook – Flexibility

Negotiations between a buyer and a seller throughout a complex M&A transaction are never easy; even when there are two motivated parties and lots of mutual goodwill.  A successful close is pre-empted by agreeing to the finer terms of a deal; some that favour the buyer and others that favour the seller.  It is rare for either party to claim post-close, that they made the perfect deal.  The inevitable compromises during the negotiation process usually at best lead to a good deal for both parties, and in most cases require flexibility.

Knowing where and when to exercise flexibility can be tricky.  It starts with being able to Listen to Learn.  Listening to learn helps uncover unspoken assumptions or misunderstandings that can lead to a failed negotiation.  With a deeper understanding of the counter-party’s key priorities, there is a better chance that a solution can be found that works for everyone.  It also helps negotiators find the right compromise or limit the time spent on an undoable deal.  It is always best to get to the Red Flags as soon as possible.

Obviously, when both parties have flexibility on the purchase price and deal terms, it can help increase the probability of a successful close.  While buyers often prefer to share the acquisition risk with the seller through some type of deferred payments, such as earnouts, equity rolls, or vendor financing, sellers often prefer all-cash deals.  Sellers are advised to seriously consider all the positive and negative implications of deferred payments.  Sometimes deferred payments can provide significant tax savings that should be explored with the seller's professional tax advisor.
Having flexibility on the deal process, timing, exclusivity periods, etc. can also help both buyers and sellers close more deals, even though the relative advantage for the buyer or the seller can vary widely.

Inevitably, there are negotiating points that are zero-sum.  In other words, if the seller wins, the buyer loses and vice versa.  This can often be true around the relative tax implications for each party.  It can also be the case during the negotiation of the purchase and sale agreement, which can be an unwinnable battle between the legal teams if one or both legal teams are too inflexible.  The legalese around reps and warranties, the magnitude of the basket and caps, and the relative indemnifications can have huge legal and financial implications for both the buyer and the seller.  The key here is to have experienced legal teams that have completed numerous M&A deals and understand the “give and take” mentality required to get to the finish line.  If one party zealously protects the legal risks for their client and thereby pushes a disproportionate amount of risk to the counterparty, the deal will normally never get completed.

For buyers, having flexible financing options arranged beforehand will also help close more deals.

Both buyers and sellers always need to be prepared to “walk” from deals that do not meet their highest priorities.  For sellers that means ensuring that there are alternative buyers or the option for continued ownership.  For buyers, that may mean building and/or developing a new business unit rather than buying or pursuing another suitable candidate.
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Some buyers and sellers view the M&A negotiating process as a game of chess or poker.  That is, each move requires a countermove, and you need to outwit your opponent.  If either party is playing games by holding onto key information too long, negotiating in bad faith, or simply continually moving the goalposts, the likelihood of a successful transaction is very low.  A better approach is to provide the information required by the counterparty as needed and when appropriate, gain meaningful insight into each other’s key objectives, and work together to find the workable solutions to the inevitable roadblocks to getting a good deal completed.

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