Included here are a couple of techniques, common in modern psychology, to help you develop rapport and a better understanding of the seller’s perspectives and aid in a successful acquisition.

Biases can sour negotiations, yet most people are unaware of their own biases. It’s impossible to avoid, so be self-aware and maintain objectivity. As you move past diligence and into negotiations, you will be exposed to an entirely new set of biases. Following are a selection of biases along with tips for how to respond;

• Confirmation Bias. The tendency to favor information that confirms existing beliefs or hypotheses can become particularly problematic during the due diligence process. Confirmation bias manifests when you seek out evidence to support your case. Stay objective and solicit objective opinions from your investors and subject matter experts.
• Cognitive Dissonance is the distress felt when you simultaneously hold contradictory beliefs. Stay objective, solicit objective opinions from your investors, and stick to your ‘Walk-Away’ Price.
• Groupthink or the tendency for an individual to adopt the mindset of a larger group, often occurs within the management team or between the seller and broker. The pressure to fit in often leads people to remain silent in times of doubt. Certain doubts and issues around the viability of a deal may be left unquestioned. One of the ways to counter groupthink is to create the environment necessary for individuals to express their initial opinions, like smaller, more personal interactions with the seller and the team.

TIP: Commit to the ‘Walk-Away’ Price and Terms before entering negotiations, which will require upfront research and the discipline to ‘walk away’. Maintain a careful log of offers and concessions throughout the deal and use the Negotiation History worksheet in the RFC Diligence Workbook

• ‘Hindsight is 20/20’ so beware of hindsight bias which skews the memory and the perception of past successes or failures. Especially in times of stress, most of us tend to oversimplify reality and overlook important details of past agreements or concessions.
• Outcome Bias is the tendency to remember an event solely based on the outcome. (“Do the ends justify the means?”) Just because something worked once does not mean it will work again. Be mindful of your susceptibility to and work to maintain objectivity to arrive at a deal that will be good now and years later.

Framing the deal as an opportunity will significantly impact the seller’s impression! If the deal is framed positively, it can make the seller more interested and risk-tolerant. Depending on the circumstances, it can be effective to incorporate loss aversion into your questioning. The party who feels they have more to lose and are the most afraid of that loss has less leverage. Only after you understand the Seller’s motivations is it possible to persuade the Seller that they have something real to lose if the deal falls through.

TIP: For brokered or represented deals, there is a distinction between the negotiating counterpart and the company they represent. Consider a banker or broker's compensation and career goals which may play a role in their decision-making.

Constraints and external factors can limit negotiations. Sellers may be constrained by advice from lawyers, investors, advisors, spouses, or their team; by prohibitive policies, or by the fear of setting a dangerous precedent. Constraints that can cause the seller to act in ways that seem irrational - and that can destroy the deal. Unfortunately, constraints are often hidden or ignored. Rather than dismiss the seller as unreasonable or the deal as unworkable, pursue a discussion about constraints to help overcome them. The seller’s constraints may seem like it's “their problem”. That is a false premise. Overlooked constraints become your problem following the acquisition.

TIP: Repeat the last three (3) words or repeat the most critical pieces of their comments.

Labeling is a “verbalization” of the emotions of the situation. In other words, pay attention to the seller’s feelings, give the emotions a title (i.e., label), and then very calmly and respectfully repeat their emotions.  For example, “It seems like you think I’m being unfair”, or “It sounds like you understand this business” gives the seller a chance to better explain themselves or help you better understand their perspective.

Accusation “Audits” are a sub-technique of labeling where you preemptively label all of the things the seller could say about you or the deal. Before negotiations, privately list the worst things that the seller could say about you. Prepare your responses in advance to prevent the negative dynamics of negotiations from taking hold. For example, consider a situation where you have to ask someone for help and a request you know they will dislike. Consider preempting the situation by saying; “Hey, I know you probably think I’m being annoying with this request; I can imagine you think this is a waste of time, you probably hate me right now.”  

Deferring is where you give the seller control by asking the seller to impart their wisdom and experience, which will inspire them to speak at length, revealing important information. For example, “I see you know quite a bit about this — how can I do something similar?” Buy time with these questions, learn your counterpart’s strategy, evoke feelings of control, and use that period of discovery to your advantage.

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When to Walk Away

Dishonesty. If the seller is dishonest with you, or you observe them being dishonest with others, it is best to walk away quickly. As Warren Buffett said, “You can’t make a good deal with a bad person.”

• Insurmountable Risks that cannot be accommodated in adjustments to the purchase price or terms, such as; large customer concentration, heavy churn, low cashflow after necessary reinvestments, bad customer reviews, new regulatory issues, declining revenues or margins, are all reasons to potentially walk away.  
• Lack of Investor Interest. Your investors invested in your fund and are invested in your success. Provide investors with sufficient time and details to evaluate a deal. Be transparent about the risks, outstanding information or data requests, the timeline, and commitments from banks and other investors. If an investor is opposed to the investment, ask, “What would it take for you to become interested?” Lastly, don’t take negative feedback personally. If most investors are opposed to the investment, it may make sense to respectfully recuse from the process.

TIP: Consider the RFC Deal Memo, Deals In Play, and FAQ templates included in RFC Search Funds / 7 Financing