When you negotiate the sale of your business, a useful M&A negotiation strategy is to anchor the negotiation from the top with an aggressive demand. When we hear high or low figures, we tend to unconsciously adjust our expectations in the direction of the figure we have heard.
Using anchoring in M&A negotiation strategy has a psychological effect
The anchor has a strong psychological effect and it directs the operation in favor of the person who throws it down. This way, you inevitably condition the other party, who then has to rethink their position.
When an anchor is introduced into a negotiation, the ZOPA (zone of possible agreement) usually turns in its direction. The negotiation turns towards the zone of the person who has thrown down the anchor.
Because of this, many people think you should make the first offer and that first offer should be aggressive. Naturally, this anchor is more effective when we actually have other offers and candidates, because if we end up breaking negotiations with the anchor, we will have other options.
DO YOU WANT TO KNOW MORE ABOUT M&A NEGOTIATION STRATEGY? READ “NEGOTIATION IS YOUR POWER WHEN SELLING A BUSINESS”! YOU WILL LEARN ABOUT HOW TO VERIFY THE POWER OF THE OTHER PARTY, AND ONETOONE NEGOTIATION EXPERIENCE WHEN SELLING A BUSINESS
How to throw down an anchor
By making the first offer, you are risking the breakdown of negotiations, as you might throw down an anchor that is too big. Therefore, when you throw down your anchor, it is best not to be categorical. It is not necessary.
Sometimes, we do not even need to make an offer to throw down an anchor. For example, for the buyer, it can be enough to make affirmations such as “Naturally we have to perform a good due diligence in order to know the company better, but companies belonging to this sector are being sold at 4 times EBITDA, which is what we are thinking of.” Even if it is not a good offer, this offer has the effect of an anchor because it hinders the seller’s expectations.
Also, launching the first anchor softly can stop/delay the other party throwing down anchors on their side. In order for your demand to be believable, you should always back it up with rational arguments that can be discussed. You should support them with standards, references, or precedents that make it credible. You will not offend the other party if you can logically justify your demands with solid arguments.