The aftershock of hard negotiations
They say the best salespeople can sell just about anything to anyone: ice to the Eskimos, sun to the Saudis and fire to the Devil. They do this by understanding behaviour, analysing motives and focusing on what matters at the time (which may not be what matters in the long term).
In private equity, we make investments in businesses worth many millions of dollars. The need for negotiation is therefore implicit. But, we don’t just negotiate price, we negotiate terms, contracts, and many other things, which in aggregate, constitute the deal.
I suspect a salesman who can sell ice to Eskimo can also sell a 3x multiple and aggressive anti-compete terms to a founder. But unlike the Eskimo, whom you’ll likely never see again, you may have to work with the founder for many years to come.
If you create resentment now, your great multiple of 3x EBITDA may look like 9x EBITDA in six months when earnings tank due to managerial revolt. You may get comfort from the fact the founder is still invested and wouldn’t want to sacrifice his/her own wealth, but then you’d be ignoring human irrationality and the utopic feeling that comes from revenge.
So what’s my point? I think it’s important to play it fair with founders and managers for the sake of the future. While significant value can be created by a great entry price, significant value can be lost thereafter. I’m not suggesting that you capitulate to founders’ demands, but I suggest we all practice a little foresight. Nothing can beat the power of a fully-aligned, determined and resourceful team (of investors and investees), even a low entry price.
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The Private Equiteer
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Shibumi