Getting to “No” in the Deal Negotiating Process

Most rational people enter an M&A deal negotiation with the intent to close the deal but with an understanding that some compromises will be required along the way. There may be some healthy skepticism on the probability of a successful close by one or both parties but typically there is also some level of hope that it will work out and that a deal is doable.

However, like any important negotiation process, it is critical to know your “red lines” and when to say "no", even if it ends negotiations of what is otherwise a good M&A deal. The challenge is to ensure those items are dealt with early in the negotiations so that you and your team minimize the amount of time and resources you waste on a deal that can’t be completed.

Defining your red lines early doesn't mean being closed-minded to finding creative solutions to address your concerns. Both parties need to look beyond their counterparty’s “position” to explore their “interests” and focus on inventing options for mutual gain.  It can be hard work but worth it if an otherwise undoable deal becomes doable.

Unfortunately, it's not enough for only one side to focus on such principles.  Far too often, one party walks away from the deal at the "11th" hour based on issues that should have been addressed early or that they should have known much earlier in the process.

For the buyer, this can happen for any number of reasons. Sometimes, the buyer’s deal team may seem to be uncoordinated and unclear on the deal’s major objectives. Some members of the deal team are focused on immaterial due diligence details while some of the key decision-makers may not have entirely bought into the concept. This seems to be more common with larger corporate buyers.  Larger corporations sometimes require a diverse group of internal approvals across the organization, and it often seems that almost anyone can veto the deal if they’re not completely on board.  Of course, the more senior the “objector”, the more likely their input and opinion can kill the deal.  The deal team must keep the key decision-makers on board throughout the negotiation and due diligence phase to ensure that the entire process does not waste valuable resources, nor does it sour relations with the seller if the buyer walks late in the process.  The deal team needs to thoroughly explore the acquisition from a wide range of perspectives and have an early and deep understanding of the red lines from each of the key decision-makers’ frames of reference.

Sellers' red lines usually center around value but could be any number of factors, such as the amount of rolled equity or its share structure, non-competition clauses, transition or employment contracts, etc.  Sellers should insist on having discussions about the key deal terms and “must-haves” early in the process and each should be spelled out clearly in the LOI.  All too often a lot of key deal terms are excluded from the early negotiations because the buyer is unwilling to commit without further due diligence. Sellers should insist they be agreed to, at least in principle, so the buyer knows up front what is non-negotiable.

Some sellers are reluctant to expose certain aspects of the business early on in the negotiations and due diligence if they feel they could devalue the offer.  This is usually a mistake and is a good way to waste everyone’s time and money.
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Every M&A deal negotiation has its nuances, however, the probability of a successful close increases when both parties 1) ensure all key decision-makers are on board from the beginning, 2) address the most important “must-haves” and “red lines” upfront or early in the process, and 3) remain open-minded to finding creative solutions to address their counterparty’s interests.

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