This post was originally featured on Mike Rogers website.
Every now and then you may get a larger company asking about buying your smaller company. How do you respond?
Do you say I’m not interested? Do you tell them to make an offer? Do you act nonchalant? Do you chase after the opportunity?
There are a lot of different scenarios to play out but there are some basic positions to take and a mindset to understand.
There are 3 fundamental positions to understand:
Start from Strength
If this is your first time selling a company, do not assume that the bigger company is more experienced and put yourself in a negative state of mind and position. Even if the acquirer is VC backed most companies do very few acquisitions and VCs are more interested, and tend to get more involved, in sales than purchases. So the first thing you have to do is stop thinking of yourself as in a disadvantage. You have something they want, that’s why you’ve been approached. Start from strength.
What Do You Want Out of the Deal?
Next you need to understand clearly what you want out of the deal. Do you want to sell? To this company? What is your Magic Number? The Magic Number is when the valuation of your company makes your desired return, to Everyone. That includes investors, employees, and you. Figuring this out will help keep you focused and on task through any of your discussions.
When you know what you want out of the deal, and it doesn’t even have to be rational or justifiable, and you’re starting from strength, you’ll be more prepared for negotiations.
Who Will Make the First Offer?
One of the first things everyone worries about, or possibly takes for granted, is who will make the first offer? The standard position is always to wait, don’t make the first offer, especially if this is your first time in these types of discussions. But I disagree. Strongly.
There is one underlying feeling guiding this principle- FEAR.
Both you as the seller and them as the buyer have the same fear – If I make the first offer am I hurting myself somehow?
If I’m the buyer and I make the first offer, would the seller actually have accepted less? Essentially, I’m setting the floor and I’m afraid it’s too high.
If I’m the seller and I make the first offer, would the buyer have offered more? Essentially, I’m setting the ceiling and I’m afraid it is too low.
So both parties dance around the subject.
Contrary to the commonly held wisdom, people who make the opening offer in a negotiation have the upper hand.
The advantage is owed to something psychologists call the anchoring principle. It’s a cognitive bias where people rely too much on the first piece of information they have.
You can read tips on making the first offer in my blog post, Why You Should Always Make The First Offer In A Negotiation.
Getting comfortable with these three points will help you with your negotiations. Yes, there will be a lot of uncertainty and nervousness – that’s what makes this fun! But good preparation will help.
Yes, there will be issues to deal with like timing, term sheets, due diligence, and possible earn-outs and responding to a low offer, but from these starting points will put you in a good position.