How to negotiate concessions to ensure a better M&A deal

Seasoned negotiating skills are the key difference between closing a good deal and closing a great one

Massimo Penzo
October 2019

This statement seems a bit excessive, but it is extremely realistic when it comes to corporate finance transactions, especially in the context of mergers and acquisitions. Negotiation is, in fact, closer to an art form than a science because it involves the ability to “read” the counterpart in a creative way, understanding when to remain firm and when to be more flexible.

Often both the buyer and the seller, intent on pursuing their own goals related to the deal, end up in a mutual block in which there is little room for compromise.

The mood turns tense, behaviors become rigid, all at the expense of reaching an agreement with acceptable negotiating terms.

In order for a negotiation to be successful, both parties must have the perception that they are moving towards a good deal: structuring an M&A operation on a solid basis means working to achieve a “win-win” situation for both the seller and the buyer.

And this brings us to the art of compromise through concessions.

Concessions are almost always necessary in order to complete any type of deal. In order to get a concession, you also need to be flexible and accept them on behalf of the other party. Easier said than done, and without specific experience managing concessions can be tricky!

So how do you negotiate concessions successfully?

1. Firstly, never assume that your actions are self-explanatory and easily interpreted.
Making a concession to another party is not often seen favourably. Unless you clearly clarify that an important concession has been made, the counterpart will tend to underestimate it, perhaps ignore it.
Why? For a very simple reason: the interlocutor will always try to avoid cogent contractual obligations for which there is an implied obligation to do the same.

2. Demand and define reciprocity
Labelling your concession triggers an obligation to reciprocate, but sometimes your counterparty will be slow to act on that obligation. Not only is it important to label your concessions, but also to begin to define the form that the return concession should take.

3. Emphasise the benefits connected to any concession.
Emphasising the benefits of a concessions to the buyer/seller is an excellent way to keep negotiations on the table. When negotiators offer mutual concessions based on the benefits they receive, they tend to minimize the sacrifice that the other party is willing to make in return.

A typical way in which a seller can emphasize the benefits it brings to the potential buyer is to compare the offer received with ones made by other interested parties (assuming of course that these exist).

4. Don’t give up too easily.
Timing is essential in every negotiation. No deal is the same, even when compared to similar transactions. Your concessions will be stronger when the other party evaluates your initial proposal as serious and reasonable. So, when you offer concessions, make sure that what you-re giving up (or have given up asking for) is perceived as an important and significant sacrifice. By doing so, you make it clear that a concession has been made.

Let’s analyse the following negotiation between a marketing services company and a potential buyer. The latter objected to the fact that the company’s costs were estimated at an unreasonably high level; the marketing company, on the other hand, believed that the cost estimates were accurate (even conservative) given the complexity of the components and the external factors involved.

If the seller decided to make a concession to the other party, he could say: “It was not easy for us, but we made some adjustments on the more delicate cost items to meet your concerns. We now expect that on your part there will be greater evaluation flexibility, linked to specific short-term income performance.”

Note that the above statement achieves three objectives:

1) It establishes that a concession has been made (“It was not easy for us, but we made some adjustments …”)

2) It tactfully questions reciprocity (“We now expect more flexibility from your side…”)

3) It begins to define the exact form that reciprocity should take (evaluation flexibility linked to specific short-term income performance”).

It should also be noted that no-one fully understands what you value most, better than yourself. If you are not explicit and you fail to clearly define what reciprocity means to you, it is likely that the counterpart will have an idea that is not aligned with your expectations or, worse, come up with something that is only aligned with their agenda.

Ideally the negotiating parties should create an environment in which no-one tries to play down during negotiations; each actor needs to understand their counterpart’s interests and fears so as to move forward in good faith and achieve a shared goal. Unfortunately, this “sharing” approach is not always feasible and sometimes one of the two parties do not act in good faith!

6. When there is a lack of faith, contingent concessions can help
If the level of trust is low or there is no firm conviction in proceeding along a serious negotiating path, it then becomes advisable to offer “contingent” concessions: specific concessions that can be proposed provided that the other party is also willing to grant them in return.

These types of concessions are practically “risk-free”; that is, they allow you to point out to the counterpart that you are willing to make concessions, but only if there is a concrete willingness to reciprocate during negotiation.

7. Make concessions in installments
A technique that is sometimes used is to make concessions in installments. Most negotiators expect to trade offers back and forth several times. If you give everything away in your first offer, the other party may think you’re holding back even though you may have been as generous as you can be.
In fact, it has been noted as one of the most accredited practices in the negotiating field because, while it is generally preferable to receive bad news all at once, there is a natural tendency to appreciate good news a little at a time.
This human tendency manes that a concession (perhaps of a substantial nature) made gradually – even in temporal terms – is more likely to be accepted by the counterparty.

The illustration of the aforementioned strategies aims to underline our initial assumption: ensure that concessions are not ignored or exploited to the detriment of those who grant them, and make sure they are treated and framed in the broader process of reciprocity that must lead to the successful conclusion of the transaction.

The ability to negotiate therefore means knowing how to guarantee, not only that the concessions made are reciprocated, but also that they are recognized as such by all counterparties.

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