Price isn't just one number that you settle on. It's the structure of how much you'll pay and on what schedule you'll pay it. In some cases, you'll agree to pay off the target's debts, pay proceeds to different parties, and pay over time.
- A deal's price isn't just one number that you settle on. It's the structure of how much you'll pay and on what schedule you'll pay it. In some cases you'll pay off the target's debts, pay proceeds to different parties and even make payments over time. Some elements of the pricing negotiation that you need to consider are how much are you going to pay and on what schedule are you going to pay it? That schedule is going to impact the net present value of that deal.
Paying somebody more money later may be worth more than paying less money now. What obligations are you going to assume as part of the deal? Will you take on their accounts payable and pay those off? Will you take on their debt and pay that down? Will you pay in cash or are you offering equity in a combined entity? Will the owner work for you? What will you pay them in salary and bonus? Will you sell them something in the future at a discount? One organization I worked for sold franchises.
We were trying to buy back one of our franchise territories from an owner. We couldn't bridge the gap between what he wanted and what we were willing to pay. The way we eventually got the deal done was we told him we would sell him another franchise territory in the future at a discount. That discount helped us bridge that gap between his expectations and what we were willing to pay. In any negotiation for an acquisition, you should try to pay as little as possible.
And by the way, they're going to try and get as much as they possibly can out of you. If you understand the value of different items in the deal and how they impact price, you may be able to bridge that gap and get a deal done where that initial price isn't enough.
- Describe the forces in the Porter's Five Forces framework
- Identify the elements that go into making an acquisition case
- Contrast the benefits and costs of approaching a target directly or indirectly
- Explain why the Herfindahl-Hirschman index is important
- Explain how to conduct good valuation analysis
- Identify four methods of paying for an acquisition
- Discuss the reasons for including additional deal terms beyond price
- Describe the due diligence process and explain why it's important
- State the reasons why communication during integration is critical