Negotiating high selling price in mergers, acquisitions

In last week’s article titled “Negotiating low purchase price in mergers, acquisitions” I shared some ideas on how a prospective investor or purchaser of a business or shares can negotiate the seller’s asking price down.

I received numerous inquiries to address the reverse situation where the seller wishes to negotiate a high or more favourable selling price.

In this article I therefore give some tips on how the seller of a business or shares can negotiate a more favourable selling price.

How owner of a business or shares can negotiate favourable selling price As I have explained before, in my experience of mergers and acquisitions, most transactions that fail or succeed, do so around the purchase or selling price.

The owner of a business or shares would want to get the most upon selling whereas the prospective purchaser or investor would want to pay the least.

This results in a range of values for negotiation with the hope that the seller and the buyer will come to some agreement.

I have explained before that the process of coming to an agreed purchase price can be difficult, stressful and at times protracted. The party with sharper negotiating skills and knowledge of deal structuring normally smiles more at the end.

Factors that can influence a favourable selling price
Below are some of the key factors the owner of a business or shares can motivate to influence a more favourable selling price. They are usually used in combination.

Do your own valuation
It is advisable to engage an expert business valuer to carry out a valuation of the business or shares being sold. Different valuation methods and assumptions can be used. A valuation normally results in a range of values from minimum to maximum. A reasonable seller usually tries to secure the highest price possible.
Selling without a valuation can easily be tantamount to groping in the dark, giving away value for a song. It is not uncommon for a party to a bad deal to try to wiggle out through deliberate breach. There have been reports of some investors losing value by not causing a valuation of their shares before selling their shares in mining companies.

Check if buyer has done own valuation
A prudent investor usually engages professionals to carry out a comprehensive due diligence of the target business or shares and valuation of thereof. Check if the buyer has done this and the range of values he or she could be looking at. Understand the valuation method used, the assumptions made, sources and credibility of the data used, the range of values, etc. Also have an idea of the price beyond which the buyer will walk away.

For example where the Net Assets Method is used ensure the physical assets are not undervalued. For the Net Present Value (NPV) method or Discounted Cashflow Method (DCM) variables such as future sales volumes, selling prices, operating costs, capital expenditure, discount rates such as interest rates or weighted average cost of capital (WACC) should be scrutinised. These have a significant influence of the valuation of the business or shares.

Goodwill
Goodwill is normally considered in mergers and acquisitions. Make sure it is not understated where the Net Assets Method is used. Where the NPV method or DCM is used ensure the future revenue projections reflect the goodwill.

Payment terms
There is always the temptation by buyers to induce a price reduction through offering better or shorter payment terms. Carry out a proper cost benefit analysis of the tradeoff. Of course shorter payment terms may be preferred where there is economic uncertainty or where the seller is facing a financial emergency or urgent opportunity.

However, be careful not to be forced or dragged into a more desperate situation and then be forced to take a price cut.

SWOT Analysis
Carry out a comprehensive analysis of the strengths, weaknesses, opportunities and threats (SWOT) of the business. Use the strengths and opportunities to negotiate a higher price. Without misleading the buyer, mitigate effects of the weaknesses and threats.

Competitive bidding
The seller may use competitive bidding to widen his or her options. Bidders may try to outdo each other by offering better price or terms.

Timing of selling
Selling when there is time to consider many options or when the market is more liquid may result in a better price.

Controlling versus minority shareholding
There is a premium in selling significant or controlling stake.

Approach or be approached
When approached, the seller can name a higher price unlike when he or she is the one who approached a prospective suitor. This is why some calculating sellers send their people to prospective buyers to spread the word appearing to act for the buyer and not the seller. This is aimed at giving the seller leverage during negotiation.

Conclusion
Negotiating a selling price is fundamental in deal structuring and mergers and acquisitions. A seller of a business or shares needs very sharp negotiation skills and deep knowledge to negotiate a high price.

Disclaimer
This simplified article is for general information purposes only and does not constitute the writer’s professional advice.

Godknows (GK) Hofisi, LLB(UNISA), B.Acc(UZ), CA(Z), MBA(EBS,UK) is a legal practitioner /
conveyancer, chartered accountant, corporate rescue practitioner, registered tax accountant, consultant
in deal structuring and business valuer. He is also a director with Investacare International (Private)
Limited. He writes in his personal capacity. He can be contacted on +263 772 246 900 or
gohofisi@gmail.com-The Herald