Build a range and a minimum and maximum purchase price (e.g. football field) Ensure your maximum price exceeds 35% IRR which will leave room to adjust pricing and terms as the negotiations continue

1. Anticipate Anchoring

Before presenting a firm purchase price, develop your own internal and private valuation and a range. Present a conservative yet competitive range of potential purchase prices, to avoid the negative effects of anchoring. Once the valuation and price are narrowed, present a RANGE of purchase prices and terms you’re willing to offer. The seller might accept the original offer, or at least be anchored by the original offer. If the price rises during a negotiation, you will still be well below the highest price and the best terms you are willing to offer. Most sellers anchor on the first offer and the purchase price presented in the Indication of Interest (IOI). For example, if a buyer first suggests a 6 – 7x EBITDA, all future proposals and adjustments will compare to those figures and in the seller’s mind equate to wins/losses.

TIP. Offer fair prices and terms. Reinforce your commitment to the deal. Clarify what adjustments or terms may change within diligence or confirmatory due diligence

2. Plan for Concessions 

Concessions are necessary and naturally a determining factor for closing any deal. It’s very easy to fixate on price, but the terms of the acquisition matter. Presenting terms beyond price will help to determine the seller’s top priorities and allow for concessions. To determine what concessions, you are willing to make (and what you might ask for in return) you must be strategic about the goals of the transaction. For example, Is there any seller financing? Is there an earn-out? Does the sale agreement provide the search fund and/or investors with any recourse against the seller if problems arise after the transaction?

Maintain a cooperative, rapport-building, empathetic approach, and a ‘deal-friendly’ disposition. Beware of ‘splitting the difference’ which can often lead to a ‘bad deal.’ Trying to compromise on an outcome where both parties feel unsatisfied is worse than no deal. A simple example: your parents want you to visit, but you have a lot of work to do. You feel bad so you pay for a flight and take time off from work. During your visit, you feel rushed and stressed out which provokes an argument that normally would have been avoided. Trying to compromise ultimately made both you and your parents worse off as opposed to negotiating a different time to visit.

3. Anticipate the Re-trade

Even if you’ve done everything right, remain alert for potential tricks, especially as you near the ‘finish line’ and agree to the terms of the acquisition. A classic line you may encounter from bankers and/or brokers is to “re-trade” the deal or reject your offer, only to increase the purchase price or other demands.  Consider the experience of buying a car, when a salesperson returns from the ‘manager's office’ only to tell you there is a competing offer but ‘throw in a few thousand more and we will add the floor mats for free’.  This is unfortunate and demonstrates questionable ethics but remember – it’s your job to prepare for this eventuality. If the company has grown significantly since the LOI was signed, such as with a large new contract, it may be appropriate to revise the purchase price upwards. However, you should always have some sort of recourse (such as a clawback) if these new revenue opportunities fail to materialize.

After you ‘shake hands’ on the deal, the seller may come back with further demands. Be mindful of the seller’s psychology and the magnitude of the decision to sell. At each stage, confirm key terms, provisions, and agreements, to avoid surprises.