Buyer’s Guide to Negotiating an Acquisition

January 2023

Buyer’s Guide to Negotiating an Acquisition

It’s easy to get caught up in the excitement of a deal discussion but there’s no guarantee the seller will accept your offer. Negotiation is the most critical (and complex) step when it comes to merger and acquisition (M&A) deals.

Have you found a great business to acquire and want to get things moving? If you’re looking for advice, you’ve come to the right place!

We’ve put together our top tips and tricks to help you launch into the acquisition negotiation process and achieve the best outcome.

Prepare for negotiations

Did you know that between 70 and 90% of acquisitions fail? We’ve all heard the phrase “fail to prepare and prepare to fail.” This couldn’t be more true when it comes to negotiating an acquisition.

Preparation is key to successfully negotiating and closing a business acquisition. Do thorough research and collect as much information about the company you’re acquiring as possible.

Focus on answering important questions such as:

  • What price does the seller expect?
  • What price are you hoping for?
  • What is your walk-away price?
  • Why are you and the seller interested in this acquisition?
  • What compromises are you willing to accept to ensure the deal goes through?

Ask the seller for essential information

You should collect information about the business you're acquiring before you enter the first round of negotiations. This will help you determine whether the business aligns with your visions and help to avoid delays later down the line.

Key information will include three years of financial records, customer lists, due diligence documents, and so on.

TIP: Only ask for the documents you NEED during the acquisition negotiation process. Requesting too much information may overwhelm the seller and lead to unnecessary delays.

Don’t be afraid to make the first offer

It’s natural to feel worried about making the first offer. If the offer is too low, you risk paying too much while an offer that’s too high might make the seller walk away. Getting the right balance can be difficult!

However, multiple studies have shown that opening offers have a strong effect on price negotiations. According to Harvard Law School, the first offer usually serves as an anchor that has a strong influence on the discussion that follows.

3 tips to make a successful first offer

  1. Do plenty of research. It’s not advisable to make the first offer if you’re unprepared or unfamiliar with the market, so do lots of research beforehand!
  2. Consider making a range offer. Several studies have revealed that offers in a range can help you secure a better deal in financial negotiations.
  3. Make a fair offer. Your first offer can be aggressive but make sure it’s not offensive or the seller might not take you seriously.

TIP: An M&A advisor can offer valuable advice when you are starting the acquisition negotiation process. Browsing an M&A advisor directory is an easy way to find an affordable advisor that suits your needs.

Write a strong letter of intent (LOI)

The LOI is one of the first documents negotiated in an M&A deal. It should outline all terms including financial terms, legal terms, which employees will stay on, the time frame for final closing, and so on.

Don’t forget that the terms of the deal can be just as important as the price. Review your LOI carefully and decide which terms are non-negotiable.

You may decide, for instance, that you want to keep 70% of the current employees or 100% of the digital assets before agreeing to the deal.

Foundy has a range of document templates, including letters of intent inside our resources section

Suggested reading: What is a Letter of Intent (LOI) in M&A & How to Write One

How to negotiate startup valuation

The startup valuation is negotiable and the ultimate goal of acquisition negotiation is to close the valuation gap between buyer and seller.

According to experts at Firmex Inc, this can be achieved through contractual solutions or by leveraging prudent negotiation and expectation management.

How long does it take for the seller to accept my offer?

Technically speaking, the seller can take as long as they want to respond to your offer. That said, there’s strong competition in the M&A market and it’s in the seller’s interest to respond quickly and get things moving.

You can improve your chances of getting a quick response by demonstrating that you’re a serious buyer e.g. by making a solid offer and having all your finances in place.

Still looking for a good startup to acquire?

Join Foundy today if you’re looking for a high-potential startup to acquire or would like expert support from experienced M&A advisors. Reach out if you have any questions - we’re always happy to help!

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