Win/Win vs. Win/Lose Dynamics in M&A Negotiations

30 Sep Win/Win vs. Win/Lose Dynamics in M&A Negotiations

Shoot The Moon

Win/Win vs. Win/Lose Dynamics in M&A Negotiations

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“The journey of 10,000 steps starts with the first one.”

Mike Harvath, Matt Lockhart, and Ryan Barnett discuss the importance of win-win dynamics in M&A negotiations for tech-enabled services firms. They emphasize the need for fairness, transparency, and understanding both buyer and seller perspectives. Mike highlights that M&A negotiations involve hundreds of terms, and a win-win approach is crucial for successful deals. Ryan and Matt stress the role of advisors in balancing client interests and facilitating fair negotiations. They also underscore the significance of transparency to build trust and avoid litigation. The conversation concludes with the importance of advisors in maintaining good relationships post-transaction.

EPISODE TRANSCRIPT

Mike Harvath  00:03 

Hello and welcome to this week’s Shoot the Moon podcast, broadcasting live and direct from Revenue Rocket world headquarters in Bloomington, Minnesota. Revenue Rocket is the world premier M&A advisor and growth strategist for tech enabled services companies with me today on our podcast, are my partners, Matt locker. Ryan Barnett, welcome guys. 

Matt Lockhart  00:25 

Great to be here. Mike, great to be with you. I know we got an interesting topic today, Ryan, but for those of you who were outside last night, I hope you saw one of the most brilliant Harvest Moons that that has taken place in a long time. So it was quite a sight to see. There’s your forecast. Over to you, Ryan, 

Ryan Barnett  00:49 

Yeah, when it’s a a harvest, it was the nearest moon with a red color and a fall time. So I was a, technically a super harvest blooded Moon, I believe, is what they called it. And as it was an eclipse. And so last time it was, it was cool, very neat to see an eclipse. And sometimes we are able to see an eclipse in bigger things and deals that we’re talking about today, we’re working with, really negotiations in M&A deals for it, services firms, and what it means to have a win win scenario play out versus a win lose negotiator at the table. And essentially the concept here is, oftentimes, when you’re working on deals, if you come at a deal from the angle that I perhaps as a buyer going to win this deal, and the seller might be a loser, or vice versa, and you have a mentality that’s based around this, it’s really hard to get a deal done. And so what we want to talk about are really what is the setting in the right tone and making Win Win dynamics and the impact of relationships post, close. So, Mike, why don’t you get us started? You know, what are some key principles in just setting the tone of fairness during M&A negotiations? How do you start to create this win, win type scenario for companies? And why does it matter? 

Mike Harvath  02:19 

Well, you know, it’s what, what I’ve often said, you know about M&A, first of all, you know, we’ve, you’ve heard this here to say this before. You know one of the most unnatural acts in business, and part of that has to do with the amount of things that need to get fairly negotiated in order to transact a deal, there are literally hundreds of things where you have to find common ground and move to the next thing in order to get negotiated pursuant to, you know, certain things around your financials and financial performance if you’re a seller, the working capital peg and literally hundreds of terms on the purchase agreement. So coming into a negotiation, an M&A negotiation, with a spirit of fairness, and, you know, having an appreciation for walking a mile in the shoes of the folks on the other side of the table, I think will go a long way towards kind of getting to a deal. And you know, you have to understand kind of what your core principles and core interests are, and make sure that you abide by that. I think understanding that personally and understanding that from your business perspective will help you determine kind of what those things are. And you know, you certainly can, I think, approach these with the spirit of open mindedness in one that is not rooted in Win, lose. Well, contract, win, win, negotiation from win lose, in that typically Win, win means that you have been able to successfully come to a point of compromise on a deal term that both parties can live with. Now, it doesn’t mean you’re both happy about that. Matter of fact, in most cases, when you strike the right deal, whether it be on a deal term or overall in an M&A transaction, you’re probably a little bit unhappy, or you’re probably not fully satisfied. Might be another way to put it, and that probably means that you’re in the right place on that particular deal point, or maybe in the overall transaction, win lose. On the other hand, is a situation where someone is clearly losing and someone is clearly taking advantage of the other party, and it’s not aligned to what would be considered more market norms, or what would be aligned just the spirit of fairness. And what we find with most people that try to negotiate that way is that M&A deals don’t get done, and likely because we often say there’s enough checks and balances with M&A advisors and lawyers and accountants and other professionals that are involved with the deal, maybe your bank, that the oversight of those parties pursuant to the transaction generally doesn’t allow unfair deals to get done. You’ll start getting questions from those advisors if a certain overall deal looks to be unfair. And I think that’s appropriate, and should provide you some solace. So how did I do Ryan, did I set it up okay here? 

Ryan Barnett  05:41 

Yeah, I think we got a good base and to understand kind of the players here. If you’ve got a transaction, you’ve typically got a buyer, who’s someone who’s looking to acquire a firm. You’ve got a seller, someone who’s looking to sell their firm, and you’ve got the, I’d say, affiliated parties with the deal. So in the case of us, we’re an M&A advisor, and it brings up part of the this, this fairness question right away, Mike and Matt, both of you here, yeah, is it when you’re setting up that that deal in the seat of an advisor? You know, we often take the side of either what we call buy side, who are helping acquirer, or a sell side in which we’re we’re helping the seller. And I’m curious if, Matt, maybe, maybe how you can kick us off, if you’ve gotten to a point where you started to look at the alternatives, and you’ve gotten to a point where you’re starting to work on us, how do you balance that advisor of working on behalf of your client and their respective interests, with a buyer looking to get the best deal done at the best price and a seller looking to optimize their enterprise value. I mean, how do you get how do you come to the middle there and understand you might you’re really ultimately working for the deal and creating a win, win scenario for everyone when we play this advisor type role, 

Matt Lockhart  07:05 

Yeah, great question, Ryan, I think that you sort of started it, which is, is we are working to the benefit of bringing the transaction together. You know, when we’re talking about negotiating, we’re talking about within a band of reasonability. Or, as as Mike said, you know, what is market right? What is, what is a generally accepted market band of negotiating terms? And, you know, we set things up so that it’s going to be within that band of acceptability for both a buyer and a seller. And so then you’re, you’re sort of negotiating, if you will, a bit on the on the edges. Our role is to bring people together to understand that, that there’s gives and takes in, in the negotiating of terms, right? And then eventually the negotiating of legal agreements and keeping everybody focused on the goal is not just to get a deal done. The goal is to get a deal done that is going to then create accelerated value for the combined entity, or the new company, and and the real win for both the buyer and oftentimes the buyer and the seller, if the seller is going to be selling in and staying with the firm, is what happens post transaction, and The gains that are arrived and the value that is created post transaction. So our job is to while we’re representing one side is to both represent our client, but then also represent the benefit of the transaction closing and what can happen into the future and and, you know, it’s that is to the the benefit of of all parties is, is us being able to play that sort of dual role, if you will. 

Ryan Barnett  09:18 

Yeah, it’s when we’re in that position. Ultimately, I think the deal does become critical in that you’re looking towards a deal. And I think part of this, we often say a lot of phrases over and over again, but we say them because they’re true. It’s, you know, a deal gets done between a willing buyer and a willing seller, and so part of that is creating that agency to of the firms, to to get to a deal that that everyone can be comfortable with doesn’t mean everyone’s going to love it. I think that’s part of the point of this podcast, is that people are going to walk away realizing that they perhaps both sides, have given and. It may not be a quote, unquote fair deal at the end, but it’s going to be a correct or right deal, and that needs to be done to help a willing buyer and a willing seller get across the finish lines. When you’re talking about a thing here, it seems like there’s a lot of trust and transparency needed in the deal. And Mike, I’d love to understand what role does transparency play, and soon ensuring a kind of fairness in a deal, especially for IT services firms, and why is transparency critical in these to come to a win win deal. 

Mike Harvath  10:41 

Well, transparency is super important in a variety of contexts. First of all, if you’re coming together with a buyer, you know that buyer. Let’s say you’re a seller. We’re representing a seller in this case, or you’re a buyer or seller, whichever, you have to build trust with the other side. It’s the foundation of everything that happens in an M&A transaction. And part of that trust is built around doing what you say you’re going to do, whether it be now in the negotiations or in providing due diligence information or in analyzing that information, or in sort of, you know, making performance forecasts pursuant to post transaction results, you have to be fully transparent and fully truthful, because if you don’t, the likelihood that It could be discovered that this wasn’t the case, and then a road trust with the other party. It’s actually pretty high because there’s a lot of folks looking at your information, scrutinizing accounting and legal documents and vetting your your business plan and forecast knowledgeable folks against what the likely outcomes will be in the future. And so establishing a foundation of trust comes from being very truthful and fully transparent to everything you know. It’s also important because your definitive agreement that you will agree to the representation of warranties in a definitive, definitive agreement will likely say that you have been fully transparent and truthful in the negotiations, and if It was found that you were not in disclosing information that you actually withheld information or did not disclose truthful information, and it comes out you’re liable for that. So it’s important that from the beginning and when you start a dialog between a buyer and a seller that you’re fully transparent and truthful, otherwise, the likelihood it will come back to bite you and either even potentially blow up the deal or potentially put you at risk for A lawsuit is pretty high. 

Matt Lockhart  13:21 

Well there’s a, you know, kind of recent situation, one of our clients and had done some acquisitions in the past, and one of these acquisitions, and we weren’t engaged in this, I wish we would have been the seller, basically didn’t disclose that a number of customers were going to be terminating contracts and and the seller did not, you know, was not truthful, was not transparent, did not disclose that information, and ultimately it ended up in litigation post close because of that. And, you know, I mean, life is too short. It cost that the seller had to give. Eventually, it all, everything will come to light. Hopefully it comes to light right up right at the beginning, because both parties are transparent and and other times it may come to light, you know, post LOI and due diligence, and that doesn’t set up for a good relationship. If there’s material things that were not disclosed, or it’ll come to light post transaction, and that’s the worst in worst scenario, but everything will come to light eventually. So, and it behooves all parties to, you know, come to the table and be transparent right out of the gate. 

Ryan Barnett  14:45 

I think the transparency also comes into play with expectation setting from the from the go. So if you think about these deals, and you think about a seller going through the process, if you’re working with a credible advisor, they’ll help you understand that your wish may be your number that might be much higher than reality. And so part of that is understanding that when you go to market, what the market will bear, and and having a credible advisor, by that way, helps you, helps you, at least understand a win win deal may not be the unicorn type deal that’s that’s out there, but instead a realistic deal that’s going to get done of what a buyer is willing to spend and what you’re willing to sell your firm for. And so I think a lot of that does come into transparency, transparency and how much money you your firm, or how much just transparency in the remnant stream, transparency, the EBITDA, transparency and how the ongoing business will act, that a buyer can really, truly understand what, what winning looks like after the deal is done. Mike, we’ve often said we know a deal is getting close to get done when everyone is a kind of unhappy, or when everyone is everyone’s a little mad at each other, and for a transaction you typically were celebrating when a deal is done. But why do what happens where everyone we get that sense that everyone’s kind of tired of each other or tired of the questions dig into that for me, 

Mike Harvath  16:31 

yeah, I I often say we’re doing our best work if we get to the closing table and everyone is, you know, I’m being a little bit facetious here, but Everyone’s kind of unhappy, right? They should feel like they’ve given too much, both sides, not one side or the other. That would portend a Win, Lose deal. In a win win deal, both sides should feel like they’ve given just a little bit too much. And that’s that’s right? That means we’ve met in the middle. We’ve met with a reasonable compromise on the deal terms. And as I mentioned earlier, with hundreds of these types of deal terms to be negotiated, you kind of get what we call deal fatigue, right? You get tired of the negotiations and and the challenge of all of these decisions that need to be made. They all can’t not be made. They really do need to be discussed and made and done so in a transparent way so everyone can understand the other’s perspective in order to craft a middle ground that’s acceptable to each other. May not be happy with that, but that’s acceptable, and so I think it goes a long way to spend time thinking when you’re in the middle of this negotiation, whether you be a buyer or seller or advisor or lawyer or banker, whoever one participates in these deals, because we all have a perspective that helps to come to the middle in a meaningful way that you kind of have to walk among the other shoes of the folks that you’re negotiating with. You have to be prepared to try to remove yourself from your biases and experience associated with either running a company or selling and walking as if you were buying your company and looking at it from the other side of the table, or vice versa. And begin to think about, you know, if I were them, what would I think about this, and what would I be willing to do and not willing to do? I know, for me personally and facilitating hundreds of these deals over the years, it’s certainly been helpful for me to take that position right, to begin to think about really truly. You know, how do we get to win? Win? And it does kind of help with the fatigue issue too, like, because you can go, okay, I can kind of better appreciate their position, even if I don’t agree with it. And let’s just figure out a way to get to submittal on this particular point, and then we can be, you know, refreshed to move on to the sort of next point. Because in many ways, we do negotiate many of these deal points simultaneously, but there’s only so many of them that you can sort of manage at one time, right? So, in some ways, it becomes more linear than it is, sort of a multitude of issues getting negotiated all at once, particularly as you get later in the process, where you’re getting down to likely the more salient sticking points that maybe didn’t get addressed earlier. You know, at that point, you’re the process is kind of working against you. You’re tired of negotiating all your deal points. You’re feeling like you’ve already given enough and that you don’t want to give anymore. And I think that’s the time when you really got to reach down deep and say, you know, fire with the other person. In what would I be thinking about this discussion? What might I be willing to do? And at that time, also lean on your advisor, who brings a I often say, we bring the luxury of perspective to the conversation, because we’ve seen, you know what other deals where people have made a similar compromise, and where that path ultimately was. So I think, you know, you get sort of decision making fatigue. You get tired, and you tend to also, as a kind of a warning sign, make more concessions later in the process than you do early on, because you’re just done with making decisions. That’s again, where the advisor can help you be measured and be sort of in the in the in the middle of your lane, staying in your lane, versus just throwing your hands up and making all these concessions at the end that you know may or may not need to be made. But I think it’s interesting, because certainly, as the negotiation kind of drags on, folks get tired. They want to get to the closing table. They want to get it done. 

Ryan Barnett  21:15 

Yeah, I think they, they do get tired, and then it part of, part of this is setting the right tone, and so at the end of the day, if we believe that the hired individuals oftentimes are going to be the Win Win negotiation that could lead to a better company together at the end. And Matt, I’d love to understand if How does setting the tone, gearing negotiations, making that a win win deal impact the relationship with the buyer and seller once a deal is complete. 

Matt Lockhart  21:47 

Well I think that, I think it’s super important. I think that, you know, you you strike a tone of fairness, that there is give and take and for for very good reasons, but then again, also keeping it front and center that everybody is working through these negotiations because of the the benefit that is going to Be arrived post transaction and and that when you maybe there is a specific legal point or final, you know, working capital, that’s a, maybe a good example, right? Working Capital negotiations tend to be one of the last pieces, and there is a market, sort of market fair way to arrive at an appropriate working capital peg, an amount that is left in the business. And this is again based upon market, based upon, you know, the hundreds of transactions that we’ve enabled. There’s, there’s just a very fair way to do it. Now, you know, a seller may not like that, right? They may feel as though they’re, they’re giving up money that they felt was theirs. Now, we do a good job of educating our sellers so that they understand that very early on. But again, that amount of that a seller maybe give feel as though they’re giving up is really peanuts compared to the benefit and the gain and the value that is going to be increased post transaction, right? And so, you know, keeping everybody in mind of the of the goal, the big goal, right? I think, sets the tone that that that giving and taking is appropriate to meet that end. 

Ryan Barnett  23:58 

Yeah, I think what you say that the negotiation is going to follow through? And being someone who’s negotiating good faith, making a deal that is helpful for all parties, that’s going to make everyone better at the end, is critical to get done, and that’s why deals get done with the willing buyers and willing sellers, where the end goal is really the the successful transaction, successful business after the transaction, what I heard you guys here today is that it’s critical to to really take an attitude of a win win negotiations. And that’s probably easier said than done. As Mikey had mentioned, there’s just hundreds of deal points that you’re going to facilitate and work through so well, it may, it may will be Win, win at the end. It may feel like everyone’s a little bit tired of the grind as you work through that, but that grind is absolutely necessary to get to a conclusion of ultimately, win, win. Um. I heard that kind of win lose, deals just don’t get done. And so if you’re going to take an approach where you’re trying to shove a deal term or change deal terms at the end, that’s typically just not going to get a deal done. And ultimately, we’re looking for successful transactions. I heard that having an advisor who understands both sides of the table is critical. And so if you’re working with someone, if they’re working on both the buy side and sell side, it, they might have a better idea of how a seller thinks and a buyer thinks, to help come to an conclusion. And then I also heard that transparency is critical throughout this process, and that having having everyone work through the same figure, same books will help you get to a point of of the fair deal. Mike, I’ll turn it over to you or Matt, any any closing thoughts and and go from there. 

Matt Lockhart  25:55 

Yeah the only other thing I’d add is another reason for having a an advisor in place is you can always yell at your advisor. And so if you don’t feel great about a particular term, but you’re going to have to give on it, and you need to yell at somebody. Don’t yell at the other side yell at your advisor. That’s one of the reasons that we’re here, and we’re happy to work through that again to the end of having a great relationship between buyer and seller post transaction. So with that, Mike, over to you. 

Mike Harvath  26:42 

Thanks, Matt, yeah. I mean, I would also add, you know, I think your point you made, which begin with the end in mind, is super important, knowing that, you know, a journey of a 10,000 steps just starts with the first one, and you need to keep, you know, persisting and working towards that sort of end goal, which is ultimately to successfully get to a deal. But beyond that, you know, successfully make a home if you’re a seller, for your clients and your staff, that will be allow them to continue to grow and prosper and provide a place that ultimately you’re proud to be part of, if you’re a seller and certainly as a buyer. I know the buyers that we work with take take that very seriously, and want to make sure that they’re additive and that the whole one plus one equals three or four is real. And I know that they approach these negotiations on a earnest and upfront and transparent way. So with that, we’ll tie a ribbon on it for this week’s Shoot the Moon podcast. Look forward to you tuning in next time when we will unpack further concepts around it, services M&A and growth strategy, make it a great week and take care.