Articles

Mediation Article

Bring More To Negotiations than Just a Legal Pad
Through background research vital to bargaining
By MARI FRANK
- Orange County Business Journal, February 1, 1993

As owner or prospective owner of a business, your own negotiations skills will be the critical element determining the success or failure of the acquisition or sale of a business. Your accountant, attorney and business adviser should be intimately involved with you as your agents to provide information, help you create options, and set forth the structure to the agreement, however you are the principal and you must have the greatest role as a formidable powerful business negotiator.

You must demonstrate the authority and power to enter into negotiations. There are six sources of negotiation power:

• Preparation - skill, knowledge and information.
• Legitimacy, credibility and trust.
• Social skills to develop a positive working relationship.
• Commitment to resolving the issues to make a deal.
• Creativity in providing alternatives and options.
• Promotion of a satisfying solution that will work for all parties to the negotiation.

This article deals with preparation. Skill, knowledge and information are critical to effective preparation. Negotiation preparation is the key to empowerment, enabling you to influence others to create the deal that satisfies both your needs and the needs of all those involved. In order to formulate an effective negotiation, you must strategize for success. Whether you are the purchaser or the seller, the skills are essential to a successful outcome for both parties.

The following framework may be used to prepare for a business negotiation:

• Critically analyze your present situation. Do this financially, socially and emotionally. What are your constraints? What are your long-term goals?

• Identify your objectives in buying or selling the business. To do this you need to consult with family, business associates, an accountant, an attorney, financial advisers and business advisers to provide input into the business planning. Identify economic, social and psychological needs- does this particular business really satisfy those concerns? You must clarify your desires to design a strategy that will identify the target.

• Clearly outline a tentative plan that sets budgetary limits and defines positions with regard to issues that may arise in the transaction. Define your reasoning behind those positions (your interests) so you can create options to satisfy those interests in the event those positions are not acceptable to the other side.

• Investigate and use due diligence to find out all you can about the prospective business or prospective customer. Ascertain who the owners and people in authority are. Identify the clientele, the customers, the suppliers, the competitors and all those who deal directly and indirectly with the company. If possible, meet with the employees and others associated with the company and ask open-ended questions to find out as much as you can. Ask for financial statements, brochures and all other written material about the company - any data ascertained now will be a great resource to you in determining whether or not to pursue the transaction.

• Once you have compiled substantial background information, you need to meet again with advisers before you set forth any proposals or meet formally to begin the bargaining. Brainstorm with experts about the kinds of questions that need to be answered.

Your power, influence, credibility and confidence will strengthen as you become more knowledgeable.

Familiarize your experts with your own situation and ask for information that will provide parameters on positions such as tax ramifications, financial considerations and legal protection. This may save time later, when the attorney is preparing or reviewing the proposed contract for agreement.

The more information that you ascertain and provide for law attorneys and accountants, the better they will be able to assist you as your agent.

• Find out the human side of the people you will be dealing with.  What are their reasons for wanting to engage in the transaction? Consult with them as well as their colleagues, business associates and friends to ascertain what motivates them. Ascertain their intention before anything is put in writing. Have lunch together, play golf or engage in some activity that allows people to relax, communicate and build trust-- the essential framework far an effective negotiation session.

• Be a better listener than a speaker. The words you hear will provide you with insight to address the other side's concerns so you problem-solve together and make a deal workable. No agreement will be reached if the underlying interests of all the parties are not satisfied.

• Begin formulating your ideas an paper.  List the issues that will be involved in the transaction (i.e., merger, sale of assets or sale of stock, structuring alternatives, broker involvement, tax ramifications, debts, equity, employees, investment bankers, etc.) Make sure that you make a comparative list of your issues and the issues that you think are critical to the other side.

• Formulate in writing your substantive objectives.  If you have already ascertained the positions of your negotiating partner, compare and contrast those, as well. If you do not know their position, consider what those might be by information that you have received from others.  Determine all interests that need to be satisfied and set forth your beginning position. It is best to set high expectations so you leave room for bargaining and compromise-- the closer you are to your bottom line when you begin, the less wiggle room you have.  Set forth what you believe is the most favorable position for your opponent and what you believe his/her bottom line to be. But do not be persuaded or influenced by the opponent's possible position-- create potions and alternatives to your positions assuming that your most favorable position may not be acceptable. Analyze your best alternative to a negotiated agreement and be willing to walk away and say no, if there is no meeting of the minds or no creative options that will meet the interests of all parties.

• Frame psychological objectives.   Make arrangements for the negotiation to be at a time, place and atmosphere that sets forth the most favorable of circumstances for all concerned.  Prepare written documentation, letters of intent, statistics, financial information, all relevant documents, tax returns, etc. and objective information when ever possible to back up your position. Have every document organized, and formulate a list of questions that you need to ask.  Prepare yourself emotionally, physically, and dress appropriately and professionally to set up the ambiance of professionalism.

• Make note of factual considerations. Some things that the parties will consider in the business negotiation are: tax planning, estate planning, liquidity, cash, negotiable debt, non-negotiable debts, secured and unsecured debts, equity, equity-value protection, how well prepared the financial and corporate records are; what kind of lawsuits or contracts are involved in the potential sale or purchase of the business.  The effectiveness and success of your negotiation will be determines by your readiness. Your skill, knowledge and information derived from your preparation will give you the legitimacy and credibility to build the relationship and produce a satisfying agreement to accomplish the actual consummation of the transfer.  Although your attorneys, accountants, investment bankers and management have a duty to due diligence, you as the owner or prospective owner of the business have the highest duty of all to yourself and to your business or prospective business to be a part of that due diligence. You have the tools to become a formidable, powerful business negotiator by making the effort to prepare for the process.