How to Maximize Value When Negotiating an Exit

Investors in emerging growth companies always have been more likely to achieve liquidity through an acquisition than through an IPO. And this is especially true today. Venture-backed companies are most often acquired by a partner or competitor the company knows well, so a good outcome will depend on how the company is positioned as it negotiates its exit.

As negotiation scholars David Lax and James Sebenius explain in their book “3D Negotiation,” the team (including company execs and investors) must excel in three areas to achieve great results: strategy, tactics and deal design.

A good strategy is a flexible plan for engaging the right players, in the right sequence, for the right purposes. Tactics are how you engage those players at each step along the way. Deal design is the art of crafting a package of trades that maximizes the total value of a transaction and delivers you the fullest share you can reasonably achieve.

Strategy

Any sound strategy is directed toward a goal, and the goal of your negotiation strategy should be a deal that is plausibly within your reach.

For instance, a client of mine developed a software product that a much larger company later imitated. The larger company’s extensive customer base and deep resources made competing against it a risky proposition.

We mapped the landscape of players and identified the company we thought would be our highest value acquirer. The target acquirer had embraced an open source software strategy, so we developed a plan for converting the client’s product into a free, open source platform to which premium, proprietary modules could be added for a fee. If successful, the open source strategy would enable the client to reduce costs, increase revenue and partner with potential acquirers to compete against its existing competitor.

Our client approached the target acquirer with an invitation to support the open source project. The parties struck a deal that proved successful and paved the way for an acquisition that the target acquirer decided to complete before its exclusive distributorship expired.

One of the lessons learned here is that to set your target, it’s important to identify all potential acquirers, gather data about them and identify their interests. Many interests, like acquiring a strategic asset without overpaying, will be obvious. Others, like a gap in a potential acquirer’s team that could be filled by one of your executives, may be less so.

Then, map the relationships among the players. Could a potential suitor acquire one of your competitors instead? Could it develop a competing product?

Next, set your sights on the deal you believe would deliver the highest total value to your stakeholders and ample value to the target acquirer, and then chart a path backwards through your relationship map from your target deal to where you are today.

Tactics

Tactics are the moves you make in relation to each person or organization with a featured role in your strategy. Good tactics typically serve one or more of the following purposes:

Negotiation is a fluid process, so a good negotiation plan is more like a map than directions to your destination.”

• Bringing the right parties to the negotiation table and keeping them there.

• Positively influencing their perceptions.

• Obtaining and strategically providing information.

• Facilitating communication and problem-solving.

• Neutralizing the other party’s hardball tactics.

• Binding terms when the time is right.

In another negotiation for which I recently advised, the company’s relationship with its target acquirer was lukewarm. Management feared any direct overture would produce a low-ball offer, at best. Management also thought there was only one other potential acquirer against which the target acquirer would bid vigorously, and they believed it would be very difficult to bring that party to the table.

At that time, the client’s software interfaced only with the target acquirer’s products, and the client had no meaningful business or technical collaborations with the other party.

How could we change the target acquirer’s perceptions of our no-deal alternative and its own? We arranged a series of public interactions between the CEO of the client company and senior executives of the other party. First, the CEO was a featured speaker at a conference sponsored by the other party. He spoke about industry trends, not the (non-existent) relationship between his company and the other party, but his appearance generated buzz online about an emerging strategic relationship or potential acquisition.

Next, we arranged for the CEO to share a table with one of the other party’s most senior executives at another event we knew many of the target acquirer’s senior executives would attend. To our delight, these moves not only prompted the preferred acquirer to initiate acquisition discussions, they piqued the competitor’s interest in the client company, resulting in actual bidding dynamics, not just the specter of a bidding war.

Indeed, perceptions can be influenced positively in many ways, including techniques like framing and anchoring. When a seller portrays the negotiation as a joint effort to maximize and equitably distribute value created by strategic synergies, rather than a tug-of-war about whether the acquisition price should be based upon a higher or a lower multiple of its revenue base, the seller is trying to frame the whole negotiation in a way that may justify a high valuation.

Set your sights on the deal you believe would deliver the highest total value to your stakeholders and ample value to the target acquirer.”

Anchoring is what happens when the first number introduced in a negotiation can become a magnetic focal point, even if it deviates significantly from other objective data. Mentioning a recent, high-value transaction shortly before making an offer to sell at a somewhat lower price is one way to use the anchoring effect to your benefit.

To uncover potential value-creating trades, you must also solicit and strategically share information about your respective interests, preferences, visions and other matters. This requires effective communication, which is as much about listening as it is about talking. You must solve problems constructively, and you must successively deflect hardball tactics if and as you encounter them. Key members of the team will become employees of the acquirer, so there will be no deal unless the parties maintain a positive relationship as they negotiate.

Deal Design

In another recent deal, a client feared a lengthy regulatory review of the deal. It attributed this risk to the acquirer’s history with the agency that would review the deal. My client had enough cash to reach its next financing, but announcement of a pending acquisition would freeze sales until the deal closed, and obtaining additional funding on favorable terms would be impossible if the deal collapsed.

The acquirer, which had plenty of cash and was content to obligate my client to sell while giving itself a regulatory “out,” thought the company was exaggerating the risk. The parties’ respective attitudes toward the implications of regulatory delay and the odds of disapproval were very different, and they found themselves at an impasse.

We resolved the parties’ differences—a pessimistic prediction about a risk vs. an optimistic prediction, a sense of urgency vs. tolerance for delay, little cash vs. lots of cash—by working with them.

If the transaction was subjected to prolonged regulatory review, the acquirer would make a series of sizeable bridge loans at regular intervals, and these loans would be forgiven if the regulators did not approve the deal. Other closing conditions, like the requirement that there be no material adverse change in the condition of the client company’s business between the time the acquisition agreement was signed and the time the deal closed, would be waived to the extent the company’s failure to satisfy them was attributable to regulatory delay.

Finally, if approval was not granted by an outside date, the client company could walk from the deal with no obligation to repay the loans.

Well-crafted deals satisfy the negotiators’ respective interests and preferences—whether shared, different but complementary, or conflicting—in a manner that maximizes joint value. While differences sometimes create tension in a negotiation, complementary differences are often the key to value creation.

Negotiation is a fluid process, so a good negotiation plan is more like a map than directions to your destination. A map allows you to embark on what appears to be the most attractive course and, if necessary, to chart a new course as you get new information. Create a good map and use it with skill to arrive at a deal that maximizes the value of your exit.

Jeff Seul is a partner in Holland & Knight, where he co-chairs the Venture Capital and Emerging Companies Team and concentrates his practice on corporate law and M&A transactions. He previously served as general counsel of Groove Networks, which was acquired by Microsoft in 2005, and as a lecturer at Harvard Law School, where he taught negotiation. He may be reached at jeff.seul@hklaw.com.