“The truly gifted negotiator, then, is one whose initial position is exaggerated enough to allow for a series of concessions that will yield a desirable final offer from the opponent, yet is not so outlandish as to be seen as illegitimate from the start.”
― Robert Cialdini, Influence
Negotiation is more art than science, as it involves creatively reading your audience, gathering information, knowing when to dig in, and when not to.
The art of knowing when not to dig in can be considered a ‘concession’.
The word concession stems from the word “concede”, which is typically used to convey defeat. However, concessions are an essential part of a business acquisition.
But concessions are often necessary when two business entities are hoping to reach a deal they can both be satisfied with.
How Concessions & Negotiations Go Hand in Hand
Negotiations and concessions typically go hand-in-hand when it comes to ensuring a successful business deal between buyer and seller and is a vital tool to master if you’re hoping to grow your Mergers & Acquisitions (M&A) portfolio.
Concessions mean a lot of ‘give and take‘ between buyer and seller. Concessions exist to avoid a deadlock during bargaining. They’re used to demonstrate a sense of flexibility, meaning you are willing to work with the opposing side to come to an agreement.
While smart and fair concessions can bring two opposing parties together, they also have the power to drive them apart. Approaching concessions in a selfish manner can kill an acquisition before it starts.
“Every fishing trip is an adventure.”
Every business deal is different, which means there is no one-size-fits-all approach to negotiations and concessions.
What concessions you present to a seller will depend on what type of acquisition you are dealing with, so it’s important to have a clear plan in place before you go into that meeting.
Why is planning very important?
Based on your previous conversations with the seller, you will find their motivations for selling and what they plan to do after the sale.
Then, you can ask yourself these important questions:
- Is this an acquisition in which you can improve systems to generate more profits?
- Are you acquiring the business for the customer list?
- Are you acquiring the business for a rollup?
- Do your concessions reflect your acquisition play?
- How much are you willing to leave on the table if the seller is uncooperative with your requests?
There are many types of concessions. Some examples of concessions when purchasing a business include:
- Having the seller remain employed by the company for one year.
- The buyer does not issue payments to the seller for 6 months.
- Key employee contracts must be in place before sale.
- Put seller on an earn-out deal.
- Owner to pay outstanding debt before purchase.
- Owner accepts less than the asking price in exchange for a larger profit upon exit.
- If you cash out the deal early, you get a discount.
These are just an example of the types of concessions that exist when purchasing a business.
Maybe you will present one of these, maybe you will present them all or tailor make some to fit what works for your acquisition.
The Importance Of Give & Take
You should always ask for as many concessions possible, of course within reason. Every time you accept a concession made from the seller, you must always be sure you are receiving something in return. When you master this art, you will be able to position yourself by being okay with some of your concessions being rejected for getting the 1 or 2 concessions that you wanted out of the deal all along.
It’s also important to never lose track of how many concessions have been rejected by the seller. The more terms you offer that get rejected, the more likely your seller will feel like they owe you. This indebtedness can give you more leverage during negotiating.
To be clear: Don’t try to agree on all of your concessions before you agree on a deal.
You want small wins on both sides in order to get the deal closer to a sale. Be reasonable on your concessions but more than anything create some that you know will get rejected for the reason being that you want the seller collecting some wins.
Don’t be brutal: Make the seller look one way while you are trying to accomplish something else.
Also, your conceded terms should be more than you anticipate to get. You should always inflate your concessions so that even if they are rejected, there is still potential to get what you truly want.
Emotions Behind Concessions
The psychology behind concessions is complicated. The ego and the “winner’s mentality” play a large role in how far negotiators are willing to go. But a smart buyer knows that concessions can be used as a clever tool to solidify the deal for which they are hoping to achieve.
One important thing to remember is that the way you approach a concession can be just as telling as the concession you make. What does this mean?
The psychology of the sale comes into play when you have a seller that you can’t come to terms with you, but you are very close. Go ahead and agree on the deal but proceed with due diligence and once you find issues with the business, you can then come back and renegotiate with the seller.
To execute this ploy successfully, you will have to educate him about why you can’t agree to pay on the terms you had in place initially, and explain that you have new terms and conditions.
Salesmanship plays a big role here.
What happens here is all psychology. When you agreed with the owner initially, they mentally spent the money they anticipated on receiving from the sale. It’s now easier to renegotiate because they had already made plans with that money or the terms.
Example Of A Concession in Negotiations
One example is in the purchase of an existing business. The buyer may have a magic number in mind and can use concessions to back the buyer into a corner.
For instance, concessions, like employee contracts, an extended payment plan, and ____________ can be used to distract a buyer into accepting your initial offer.
Negotiations and concessions can get heated at times. This extra emotion is all part of doing business.
Concessions Can Create A Bond
Regardless of the situation, it’s crucial to always conduct yourself professionally. Even if you feel you’ve gotten the better end of the deal, never let your emotions get the best of you and never rub it in!
Showing your emotional hand during negotiations is one way to negatively impact you on a possible acquisition.
Establishing a bond with your seller is important if you’re hoping for a long term relationship. People often do business with people they like, and people can’t begin to like you if you have a cold, standoffish approach to negotiating. People can sense when you others are being anything less than authentic, so it’s important to be open and honest without giving away too much information.
All deals are different, but there are some techniques you can apply across the board. For example, setting anchors will help establish clear boundaries.
These anchors can be used to jumpstart negotiations, but they can also be used to hold yourself accountable during a time where emotions can often run high. Having clear anchors, or boundaries, for the highest and lowest you are willing to go will make the process of establishing concessions more clear.
While you don’t want to give it all away, you can still offer your seller some insight into who you are and what your intentions are. Rank ordering is one tactic used for both buyer and seller to come to the table with clear goals in mind. Rank ordering is like sharing your list of priorities with the opposing party. This helps put into perspective which areas are open for flexibility and which are not.
Summary Of The Importance of Concessions in Negotiations
You may not always get exactly what you want during concessions, but you never want to lose sight of your main goal. The more you work on your negotiating and concession skills, the more experience you will gain in this very important aspect of business acquisition.
Have any questions about concessions in negotiations? Please leave a comment below!