Its 6.21am and I have just read a fascinating post on LinkedIn by Mike Finger. I am not quite sure how he is on my contact list as a 1st, but he is, and I enjoy his posts. He helps business owners exit their businesses. Not sure he will be much help to you because he is based in Minneapolis-St Paul in the USA. I thought he was in Aberdeen. Not sure why. However, our local equivalent is Simon Fraser in Inverness (other service providers are available!).
Anyway, Mike Finger was writing about your BATNA and its importance in any business exit. It is actually a vital part of any negotiation and without a good BATNA, you are in a very weak negotiating position.
So, if you are negotiating a business exit, what is your BATNA? It’s quite straightforward and not as sexy as this acronym suggests. BATNA stands for Best Alternative To A Negotiated Agreement. In other words, if you are in negotiations to sell your business, what alternative do you have if you cannot come to some sort of agreement or that purchaser just walks away.
Your BATNA might take many different forms. At worst, there is no-one else interested in your business and so, if you cannot sell to this buyer, you will maybe just have to break it up and sell off the building, equipment etc. If you are in this position, you are playing poker, trying to maintain that poker face, trying not to show how desperate you are to sell. The buyer is in the driving seat and if they recognise your weak hand, will force down the price. Not a good place to be.
The best form of BATNA is where you have 2 or more potential buyers all eager to acquire your business. Here you are in the driving seat. You know that if you walk away from one potential buyer, you more than likely will have at least one other waiting in the wings. Play your hand right and you dictate price and terms. A good place to be.
I have never actually come across the acronym BATNA. However, I have always understood that the best negotiating position is to be able to walk away from any deal, whether you are buying or selling. If you do not have the choice to walk away but the other party does, you are on a hiding to nothing and you need to talk to a professional in buying and selling businesses, such as Simon Fraser in Inverness.
You could also talk to someone who has actual real world experience of negotiating deals and that could even be another business owner. We have bought four businesses and absorbed them into our own. We have also been involved in countless deals undertaken by our clients, generally advising on the tax implications, which can, at the end of the day, make or break a deal. Get it wrong and you will probably be none the wiser but severely out of pocket. Get it right and you can save thousands of pounds.
I have said many times that the needs and wants of the buyer and seller are complete opposites. On price, the seller wants high and the buyer wants low. On tax, the allocation of the purchase price across assets is again opposite. The seller generally wants a higher proportion allocated to land, buildings and goodwill, while the buyer wants more allocated to plant and equipment. It’s all about the potential claw back of capital allowances for the seller and being able to claim capital allowances on plant and equipment if you are the buyer. This is one of the reasons why it is difficult (not impossible) to act for both sides in a deal, especially if we are advising during the negotiation phase.
Just like so many aspects of running a business, there is nothing particularly new in any aspect of contract negotiation. The acronyms may change, the method of communication may change, but fundamentally it is a horse trade. You did this at school. You do it in your private life with the people around you, and you have done it in one form or another all through your life.
I was listening to a recording the other day and it was discussing what it means to be in business. The fundamentals of any business are pretty simple and I have written about them before. However, there is a view out there that you are not properly in business unless you can do complicated business analysis, such as Return on Investment (ROI), Internal Rate of Return (IRR) or current values/discounted cash flows. Being able to do the complicated maths or complex functions on Excel, is so profound, that only real businesspeople can understand it. However, the fundaments of any business are much simpler than this and being able to do complicated maths does not mean that you can successfully run a business. It just means you can do complex maths. You probably learnt most of the skills for running a business, or indeed buying and selling a business in the playground. It only takes simple adding, subtracting multiplying and dividing.
You tend to think that in buying large businesses, there must be a lot of lawyers and accountants involved. That may be true but not necessarily at the negotiating stage. Warren Buffet is a well know buyer of large companies. Apparently, if he needs to use a calculator to work out if it is a worthwhile deal, he walks away. If the benefits to him and his company, Berkshire Hathaway, are not sufficiently clear cut, he loses interest. Simple maths. Back of a fag packet stuff. But it establishes the broad outline of any deal, then it can be handed over to the lawyers and accountants who can do all their stuff. But the deal has largely been determined already.
People like Warren Buffet are in an enviable position. They can walk away from any particular acquisition. But the owner of the target company may not be in such a strong negotiating position. It will depend upon their BATNA.
Your BATNA is your next best alternative. I wonder what my next best alternative to writing this would have been. Many people are probably still in bed. I am writing this and last time I looked, Helen was making a big pot of soup because she could not access the office network server yet. Now, that’s what business means to us.
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Alan E Long
The Long Partnership