by Erwin Krasnow, Garvey Schubert Barer & Doug Ferber, DEF Com., LLC
In archery, “sinning” means missing the mark. In negotiating, there are nine common mistakes that will cause you to miss the mark. Read them carefully. Then go and “sin” no more.
Lack of Eye Contact
Delegation has its place, but don’t let the lawyers do all of the negotiating. Much more can be accomplished when the principals talk to each other. And the time for the principals to talk (preferably in person) is before negotiations begin. Oscar Hammerstein summed it up: “Getting to know you, getting to know all about you. Getting to like you, getting to hope you like me…” There are few issues that can’t be negotiated successfully when the seller and the buyer like or at least respect each other.
Many buyers and sellers are too casual about letters of intent — often to their detriment. A letter of intent (LOI) is a crucial document with legal and practical consequences. Even when drafted properly, litigation might ensue. For example, although the LOI may state that it is not binding, some courts have imposed a duty to negotiate in good faith. A well-drafted negotiated letter of intent makes the negotiation of the definitive agreement easier and faster.
Obsessiveness (Un-due Diligence)
Just as there is a tendency to treat letters of intent as non-binding documents that require little attention to detail, the opposite approach has resulted in deals self-destructing. Some buyers “over-lawyer” the early stages of a transaction by trying to make the LOI or memorandum of understanding a mini-Asset Purchase Agreement. Once the decision has been made to sell, sellers want to move quickly. To use a phrase that is popular with lawyers, “time is of the essence.” Negotiations delayed may result in a deal denied.
Letters of intent are commonly regarded as a form of “anti-negotiation” insurance. A sign of disrespect for the negotiating process occurs when one party tries to renegotiate the terms of the deal after the letter of intent has been signed. Another form of disrespect occurs when buyers disregard non-disclosure agreements (NDAs). Granted, the word may leak out when employees start asking questions why strange people in suits were touring the facilities late at night. The NDA does more than keep people from talking about the transaction; it helps protect companies from losing employees to competitors who find out about a potential sale.
We’ve all heard the phrase “the game is won or lost in the locker room.” Do your homework before starting negotiations. Sellers need to understand the dynamics of the current marketplace and to adjust price expectations accordingly. Many operators have attempted– without success–to sell properties at prices that the market will not bear. Buyers also need to do their homework at the outset of a deal by learning as much as possible about the property, the market, and the competition. A good negotiator is fully prepared to discuss every aspect of the deal.
Bonus suggestion to buyers: Get a copy of the Asset Purchase Agreement used by the seller in acquiring the target property (or, if it is unavailable, other properties purchased or sold by the seller). If it’s a strong APA, it will be a great negotiating tool, supporting questions such as: “If you inserted this provision to acquire a property, why shouldn’t I use it now?”
Very often we see sellers that do not provide sufficient data to the buyer during the due diligence period. At a time of tight credit and a bad economy, the stringent due diligence required by lenders is likely to sniff out any potential blemishes that management is trying to hide. Also, secretive sellers may face their day of reckoning when the buyer enforces the reps and warranties in the APA. Secrecy works, if at all, for very short periods of time. Conversely, buyers asking for an inordinate amount of due diligence materials might spook the seller into looking for a more “deal friendly” transactional partner.
Abraham Lincoln offers this advice: “When I am getting ready to speak with a man, I spend one-third of my time thinking about myself and what I am going to say, and two-thirds thinking about him and what he is going to say.” Engage in empathetic listening and focus on the other party’s interests. It’s always better to look for ways that both parties can “win.” Regardless of what you want, before any deal can be done, both the seller and the buyer must feel satisfied. And where appropriate, admit the validity of the other party’s arguments.
Avoid positional bargaining. Focus on shared values and interests, and not on fixed positions. Both the buyer and the seller have interests that need to be met. Be flexible. Concentrate on “expanding the pie” and dividing the enlarged pie. Take a principled negotiating approach by trying to achieve a solution in which neither side feels that they have compromised too much, given in when they didn’t want to, or made unwanted sacrifices. A good negotiator is able to divide the cake in such a way that everyone believes they have the biggest piece.
Don’t be confrontational. Don’t issue “take it or leave it” ultimatums. Ultimatums rarely work. Use the term “deal breaker” and you run the risk of turning the deal into a Led Zeppelin Heartbreaker (“ can’t take your evil … go away”). As your mother said, “you will catch more bees with honey than you will with vinegar.” Be a diplomat; this approach will serve you best in the longer term — not just in the current transaction but in future deals as well. A diplomat can tell a person to go to hell in such a way that they actually look forward to the trip!
Erwin Krasnow, former General Counsel of the National Association of Broadcasters, is cochair of Garvey Schubert Barer’s Communications and Information Technology Group. Doug Ferber has been a broadcaster for 25 years and a broadcast media broker since 1988.