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Negotiating ETA Acquisition | Gautam Basu Mikko Järvinen | Negotiator 14 – Litterointi
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0:00 this is essentially where the aspiring entrepreneurs get to put their management skills seniors so as CEOs of these acquired businesses they will be trying proliferation activities increasing operational efficiency one would think that it's always good to buy sort of a highly valued and high growing companies and be the CEO and owner of
0:24 unicorn or highly skilled technology value or software as a service however this is not what the program is about you actually the speed Spotify Korean companies is more in the boring end of things so you want to have a company which is relatively inexpensive in addition to this potential like so on effects of the of the market in general
0:50 hello this is some Amir tenon I run this channel called neva Thalia or negotiator and in this episode i show how to negotiate an acquisition in a TrueNorth program entrepreneurship through
1:12 acquisition my host Gautam Basu and Miko Järvinen who will first explain the ETA concept and then I will demonstrate how negotiations can be used to acquire company at the reasonable price especially taking advantage the change circumstances in the current corporate finance market
1:38 will go through a couple of basics in negotiation first showing and evaluation and relative price work and how a weak negotiation arc is formed then I will go through a couple of information gathering tactics and how to signal in negotiations this will be later on
2:00 followed up with the rest of the training where people have the opportunity to ask me question some negotiations if you're listening to this podcast I would certainly recommend you what's also the Youtube version of it because of the slide I will be using throughout welcome to the
2:26 first ever True North Search webinar my name is Gautam Basu and I'm the managing partner at true north search we originally planned to hold this event at the altar of business school but due to the Covid 19 situation we decided to leverage the principles of agility and adaptability in business operations and we quickly adapted to the remote online format which I think many of you have
2:53 already started doing but that being said I don't think this will detract from the value will get today because we have an exciting presentation by Mr. Sami Miettinen from Translink Corporate Finance on the topic of negotiation for acquisition entrepreneurs negotiation is one of the key skills to develop if one wants to be successful in entrepreneurship through acquisition from
3:18 negotiating a transitional service agreement with the seller to negotiating the final purchase price of a transaction the art and skill of negotiation is a core competency for this career path so we're thrilled to have Sammy present for us this evening but before we dive into this exciting presentation a couple of ground rules so number one everyone on this call please mute yourself so we minimize
3:45 all background noise and number two is if you have a question for the presenter then please use the chat function in zoom to ask your question and I will monitor the chat area during the presentation and then we can ask the presenter in a timely manner with that being said I'd like to turn it over to my associate Mikko Järvinen will give us a quick review of the ETA model for those of
4:14 you that may not be familiar with that and once he's completed then we'll turn it over to Sami so Mikko the floor is yours Thank You Gautam just a moment I will be sharing my screen for you and I think I have now accomplished that successfully you see my screen right excellent good so for you
4:43 that are first time attending these our events in general or our new to t entrepreneurship through acquisition model I have just a couple of slides to actually explain what all this is about so uh essentially entrepreneurship through acquisition isn't something very new businesses have been traded probably for as long as there has been people around but
5:10 this specific approach this specific model of entrepreneurship through acquisition acquisition has originally developed in us by a gentleman called prospect in the Stanford University in mid-80s essentially we see it as a career path where an aspiring entrepreneur can search for acquire lead operate and grow an existing business so essentially an alternative to your startup path
5:38 where businesses are created from basically zero maybe the one key aspect of ETA model is three main principles it has so essentially there are the Chokey the horse and trainer Choki being the aspiring entrepreneur starting the search to acquire an established target business the horse
6:04 being an established business that is acquired and the trainer that can be an investor advisor or an accelerator that is supporting the Chokey of the journey traditionally the Chalky's have come from have been a freshly graduated MBAs but more recently we have seen people more experienced people taking this role typically people with a long management experience and
6:30 maybe looking for an alternative to the corporate life the horses are typically companies that have already existing revenues cash flow customer suppliers so something very different to your startup world and the trainer can be an investor advisor or in the case of through non-search an accelerator which is there to actually support the jockey in order to fight them through the
6:56 pool horse and have a what we would call a good jockey horse fit to move on develop that business so the four key steps of ta-ta process so as you can see the timeline on the top row the whole duration for the CTA process is estimated to be something in between five
7:19 years to 10 years and to get this started there are actually three main variations there is the assessment variation where aspiring entrepreneur essentially raises funding for these certs and acquire States so essentially project funding for the duration of 12 to 8 months to search and find an ideal target second option is TR self funded search where the searcher covers those
7:48 costs out of his or her pocket and thirdly there is the option of partnering up with accelerator which can essentially help upon some of the resources that are needed for this stage a certain acquire States that is something very I would say unique for the Entrepreneurship through acquisition process so what the searcher will do in this stage is that he or she will screen around
8:15 500 potential targets meat sellers conduct to diligence arrange finance negotiating approaches and acquires only one target out of those 500 potential ones and the fourth state's operating chrome this is essentially where the aspiring entrepreneurs get to put their management skills in use so as CEOs of these acquired businesses they will be trying proliferation activities
8:40 increasing operational efficiency and grow the revenue of the business and finally there is the exit stage typically some type of liquidy event happens in four to seven years from the acquisition and there are essentially two paths that can happen the company can be acquired by a third party or if the entrepreneur decides he can choose path of recapitalisation where he
9:10 essentially buys the investors out at this stage and may continue running the business for the rest of his life if that is what what the entrepreneur is actually looking for so I guess this sums up pretty much the four steps of the EDA process and I guess if you have some questions please put them on the chat and maybe we'll come back to that the latter part of the presentation but having
9:37 said this I think I would be happy to hand over the presentation active summing select reviewers
9:53 so we'll you can see what the share again no yes presentation there we go very good thanks
10:13 for inviting here so I'm doing this pro bono and I'm my background is I'm investing banker I spent half of my career in London 13 years in Credit Suisse and CB and the borough capital and then I have worked in the Houston banking and corporate finance in in Finland in various
10:36 institutions then that's the sort of side jet step I have been the CEO of Nordic trustee which meant sister bond holders rights in the Finnish bone structures I have credited from Alta and have MBA from USA and why I'm here talking about the negotiation is because I have a together
11:01 with Johanna Torquay published the book oh you know what Pella Walda which is because it's a quite a short a small market it's it's the market leader in that negotiation literature in Finland and here are my conduct leaders if you want to race me out so I was asked to discuss a couple of key concepts in negotiation and how they tie up to the this ETA model of acquiring business
11:30 and becoming the CEO first of all my day job is I'm a corporate financier and transferring corporate finest does mostly set aside there many businesses so we would typically be on the selling side of whereas the participants in this ETA program would be buying but from time to time we do by side advisory so I know the process and how the financing ties to it
11:58 so those are the two areas of investment banking services which are relevant to to the ETA program the buy-side M&A advisory and - advisor and if he go on to the how those two services applied to the ETA first we have to look at the outside the environment and that's of course pretty grim so this is a timeline of the fear index of weeks and this message the implied volatility and the
12:26 options in the Chicago Board of options and it's we have passed the previous all-time high peak at 2008 when the Lehman Brothers collapsed so this is a similar magnitude event we are witnessing it Kovach 19 and that's of course pretty bad news for most of the humanity but this could actually be a
12:52 pretty good model more point in time to look at this ETA model because asset valuations are down and and at some point they will obviously go up so it's a good good point to start and if he in general one would think that it's always good to buy sort of a highly valued and
13:19 high growing companies and be the CEO and owner of unicorn or highly skilled technology value or software as a service however this is not what the program is about you actually the speed spot of acquiring companies is more in the boring end of things so you want to have a company which is relatively inexpensive in addition to this potential like so on effects of the of the
13:47 market in general and you might also want to push down the price with these levers which discount the price further in liquidity no control lack of Governors and value legate's and the other Messrs so if you do this right you you can have the possibility of getting into the business at the low point at the discount and then you can exit in the more order at times with the utilizing the
14:13 premiums available in the when the market recovers but just as a reminder if you're looking to do this program to buy the next supercell this is probably not for you and I an example how people value companies they look at the enterprise value over a big da this is pellet honorable
14:41 character got a multiple e which means that how many times the value of the acquired business is a multiple of your current cash flow and as we can see in this picture the in the engineering sector of big blue chip engineering companies in the North Area the CPU typical multiple has been something like ten times or even over it and now it has collapse here in them in the current
15:09 environment and this is quite important because this determines your entry point if you end at the low multiple and exit in the high multiple that's good otherwise then you have to of course improve the profitability to fight against this out of the dropping multiple so it's a good time to do deals probably pretty soon of course if the market keeps going down then that's that's
15:36 still the bad bad timing but we don't know really and here's the data as a part of this program you would be looking at the numbers like this and the engineer sector you would look at the not only the relative Eliassen but you would look at the sales growth of the sector the profitability of the sector and then you would look at the sort of a smaller and much smaller than this actually of
16:00 the market not the big ones this is the enterprise value in atlas copco hasa enterprise value of Thor thirty four billion euros obviously this program is not looking after by Atlas Copco and it's not even looking at the boy routers but they're small much smaller companies I think out them you you mentioned that this week post spotty something like a couple of million years to twenty million
16:24 years if that's right that's correct and then you look at these discounts which I mentioned in the previous slide to sort of enhance your entry point buy low sell high okay now we move to the negotiations so this is a negotiation theory my fear is that a matter is operate in sort of
16:47 a narrow corridor of giving up this would mean that you're basically a to nice guy you give up anything that the other guy does and then if you are then a tough guy you you go for competition mode and try to sort of capture all all evaluate yourself and leave nothing to the other poor guy and then you might hug all and yet go something in the middle and but that's bad that's that's an
17:15 eye even negotiation a sort of master negotiator looks at this completely different say you either do this classic win-win so both parties win big or which is him equally important you do No Deal and both look for a better deal elsewhere of course it's provided time appropriated
17:39 to these outcomes but as a mindset you shall try the structure mutually satisfactory deal or then you pretty quickly look for options outside the theater had the play and as a sort of if you're interested in how this is done on the exit market there's a pretty good finished book exit which is
18:03 has 15 stories or half successful entrepreneurs have sold their companies to or listed them or otherwise exceeded incidentally three of the deals are transferring corporate finance deals with shown here and also the both authors have actually exited their businesses bo l l Co V and
18:25 the popular pink color group with our help then if you look how a typical bad negotiator works this is the sort of caricature of negotiation and when you don't know how to negotiate you first look at what to do before you enter the negotiation at off the table we call it dialogue planning phase
18:54 and you are I did positively the trust is here positive and distress this negative you are aided by your reputation the references hopefully you have a good ones they could be bad as well if you have a bad reputation and then there's of course some kind of pre meeting resistance because people don't know you necessarily before the meeting you enter the negotiation without agenda you somehow
19:19 scrape till a deal you start doing the transaction and you can see here it will go badly and what happens is you to first called first impression or you skip that altogether you're being rude you try to then build a relationship and perhaps exceed to push the positive energy up then you perhaps go to this bargaining model like I showed in the previous slide and then you maybe have a high
19:48 moment where there are the parties misunderstand the agreement and think they have a good deal but then that was all a fake then time is running out that's quite important negotiation you have approaching panic and you maybe want to do a deal and anyway pretty lousy deal and when once you do a lousy deal you have a declined trust carry for but you put arsenic ruin your reputation the
20:11 references and you start from the bad fourth when you do the deal that's party again or with the sort of close circle of people because people do tell about this back experiences so don't do this okay what do you should do then you should first do a bit over like the previous slide no agenda
20:35 that's that's bad so do your agenda then you you should obviously at some time wisely so you should look at what you looking at here if you take the ETA program goals here you are probably looking to buy your company cheaply and buy a good one where you enjoy working you look at what the other party
21:01 is looking at they maybe want to get cash or some of the other benefit to continue good new owner then you look at this win-win deal like if you can do the combined deals with where everybody wins and then you do quite a lot of this like a year if you have to walk away where you what would be the new pond well then this ETA program you actually do a lot of this so you create a lot
21:27 of walk away options you look at the many many new partner options so so you sort of repeat this circle with the ETA and that from time to time you do this compromises that's a deal but often people don't do this and the beauty of the ETA is you do create a lot of backup options because you you keep repeating this process with the many companies then a couple of concepts I'm going
21:55 to talk about up later on on this presentation we defined four levers of negotiates and their power analytics interaction and principles and here we define them in the form of first splitting the pie in the context so if this is your pie or cake you have to split it like who gets the benefit added value of the deal hopefully you'll get more of it and this is you just power tricks
22:24 to and negotiation handles to achieve this then you have the analytical skills you make a bigger pie you add elements to the deal which are not obvious if you're smart and clever and once you have achieved this pick up are you deliver in negotiation so the other party even if they get a smaller pie they feel good about it because here you are handling the social interactions well and
22:53 then of course the reputation follows all through this so if you're just doing this mechanically and then trying to sort of secure the other party than they are you're not doing it right so you had have a consistent principles how you negotiate and how you build a repetition over time so that this cake-baking business is for the long term not just one off and on these concepts we have a tons
23:20 of these concepts in our book and in a negotiation training we get through this ETA but if he pick Apollo there's quite a lot of power elements by the way I'm not going to cover them here today but you could use studies ranges and arch types in negotiation and you can use indirect power and the direct power to to get force decisions and walk away but here we're more mostly talking about the
23:48 analytics so you have the time management is quite key like how you how you handle the time element I touched upon the price or early on and but there's a whole lot of stuff on the game theory and how to how to sort of find the best value in the deal then the interaction I'm gonna talk a bit more about that so how you deliver your message this is done through a process called signaling and
24:14 sharing the information and then what's very very important is the negotiation team composition and with the ETA you cannot get the benefit of the team because we will be coaching coaching you and this this program and then these principals in the long term you need to have a reputation and Trust and ethics and even algorithms how you do things in the in a clever way
24:41 okay so if you look at the signalling so if you you have to sort of get in the negotiation you had to acquire information and you have to deliver information to the other party so if you use the analogy of Texas Hold'em you have five open cards eventually and then you have a to reverse here and
25:01 it's nice that they're aces so you maybe win this one but then there was a American this is this is a foreign minister I think Donald Rumsfeld and you had this fantastically misunderstood saying of the nonono's unknown unknowns and basically that's actually very smart speech
25:25 he had so when you tried to figure information there are things you know that you know your basic facts there are things you know that you don't know and then there are this Black Swan territory they're unknown on those things you don't even know don't know that you don't know them and if you can uncover this Black Swan type of information then that can be hugely powerful
25:50 they can be like M key negotiation levers so if you know for example if you're trying to buy a company and then you through method or through luck you learn that then there is a certain need for them to sell within a month the business and it's not obvious to everybody this is there's
26:15 this thing by a kind of time pressure then that's that's an example of Black Swan event which you can use to your advantage so but then you signal that this sort of open cards in this ETA program you would say be pretty open about that you want to acquire a company you want the good one with which growths and it's profitable and can disrupt the competition and you you want to partner for a
26:41 long term so it's perfectly all right [Music] openly talk about this what you don't want to do let's say this companies in the lovely city of poori but you're you're on your family's in Helsinki so you don't want to move to poori you don't you shouldn't be rude and tell that it's not doesn't going to help anybody then if this is a really terrific company you shouldn't
27:08 necessarily say that this is like the best of my options and let's say that you have wasted your time in this fund of rural program and used your one a year for doing nothing and you have three months left then you should maybe tell that you have a time pressure of your own but some people do this much more aggressively and just to give it to two guys who do this in the extreme here Anwar
27:36 Ocean Oliver who's sold his bank for the Danish guys don't skip on for over by signaling that he wants to sell it for over 3.5 billion and he got 4.1 billion just by saying that this is his walk away price yellow musk famously tweeted well why he was higher or something that this
28:01 life's worth 420 your $1 per share and he is fondly secured for his arrogance he was he was kicked out this isn't chairman I find find but you can you gonna make three meant do this even with the public listed companies which these poor we're so if you are really powerful guy you can play outside this book sometimes it's fails and how to get the information actually
28:31 trick is not to be a smart know-it-all this sadden of anybody except like middle-aged guys like me know who this guy's but it's mr. Columbo and beautiful candor Columbo was a popular TV series back in like a ages ago and the tactic of this detective was to play a really stupid guy
28:54 who just had a last question who it's completely nailed the criminal in the in the show so to get the information it's very good to actually ask question then and say that you don't actually understand this business and you would appreciate any information they can give and that's often
29:15 actually true hello there my name is Sammy tonin and this was the x-term from true north search ETA program where I described together with my hosts gautam basu and Mikko Hirvonen a number of topics on acquisition process I will do a follow-up podcast which will cover such things
29:43 as team tactics the optimal arc of negotiation and how to close the deal I will also answer a number of audience questions if you have been listening to this I would strongly recommend you will subscribe to my youtube channel Sammy Meade Dillon memorabilia or search negotiator thank you