The process of negotiating with investors implies many factors that have to be well managed to achieve the desired outcomes.There is no magic recipe for successful negotiations with potential investors, however and if you want to negotiate like an expert, the following key points will help you to get closer to your goals.
1. Understand what you really want and what your aspirations are when negotiating with investors. Goals give you direction but clear expectations will give you the strength to negotiate because you will have convinced yourself that you deserve it. As American president Lyndon Johnson said, “what convinces is conviction.”
2. Failure to prepare yourself equals preparing yourself for failure. Preparation is 99% of the success. Many negotiations fail due to the lack of preparation.
It is essential that you discover during the process what the investment opportunity represents for the buyer: Why does he want to buy? Which ones are his restrictions? What are his economic motives? Why does he need your company? What does he intend to do with it? How much does he expect to gain?
3. Reach an agreement with the ‘best’ alternative you have. A good agreement requires having good alternatives. If you lack alternatives you lack bargaining power which the buyer will exploit to obtain concessions from you. Although this seems obvious, often an entrepreneur negotiates with a single buyer: How do you know if this is the right buyer? Is this the buyer to whom your company creates the most value or the one who can pay the highest price? Only a good search method for alternatives will provide with answers to these questions.
4. A good negotiator asks a lot, speaks little and is a good listener. Share information, but above all, get information. Ask twice as many questions, seek clarification of the answers, and summarize what you have heard to verify that your understanding is correct.
5. A good negotiator builds trust, and never lies. Do not build expectations that cannot be fulfilled and keep your promises. You will gain the respect of the other party when being reliable. Lies eventually will be uncovered and undermine confidence, which increases the risk premium.
6. Create the optimal conditions for a good negotiation before meeting with the other party at the negotiating table. This is achieved by making sure the right people are in the room, with the correct expectations, at the most favorable moment for you, and that you have the best alternatives when there is no agreement. And of course, never improvise!
Prepare an overview of the various interests of all parties participating in the negotiations. Is there someone who can torpedo the operation because of other interests? How can you influence them to be supportive? Keep an eye on the people involved and their personal interests. Determine who on the other side values the operation most, and get that person to participate actively in the negotiations.
7. Identify the real decision maker. Alongside the interests of the investing entity there are the interests of the people who are negotiating. Find out who is the ultimate decision maker and what his/her personal interests, needs, and desired outcomes are. Ask yourself about the negotiator: Does (s)he have the authority to close a deal?
8. Have a sincere interest in the objectives of the other party. This will help that he in return also cares about your objectives, and creates the best mutually beneficial solution. Remember that by creating empathy you create a favourable climate for ‘grow the pie’ thinking. Be tough on your demands but affectionate with the person.
” Negotiating with investors is a game of information and information gives you power. You must seek to understand their needs rather than their wants.
9. Power is a very relative concept. In negotiations the power depends on your alternatives and the alternatives of the other party.
Remember that in a negotiation with investors 50% is emotion. Check the real power of the other party; usually it is being overestimated. Perceptions are crucial in negotiations, and it is essential to understand them well. Situational power is based on perceptions, not facts. Therefore, be aware of the signs you transmit.
10. A good negotiator is able to grow the pie rather than fight for the biggest piece. You will maximize your outcome when guaranteeing that both parties will achieve their objectives. The first step to grow the pie is to believe that a deal is possible.
Negotiating with investors is a game of information, therefore the best negotiators are focused on receiving information rather than giving information. When you better understand the needs of the other party, then you will find items that are very important to them but have less value for you. You can exchange these for items which are important to you but have less value for them.
And above all remember that in a negotiation that affects you, if you’re not at the negotiating table, you’re probably on the menu. If you are considering a corporate transaction and wish to prepare a good negotiation, do not hesitate to contact our advisors.