BERLIN—While pricing remains the primary deciding factor on deals, several other factors come into play, including reputation, experience and the ability to manage every stage of the process.
Speaking on a panel titled “Negotiating power: The essential tools for closing the deal” at the recent International Hotel Investment Forum, Sue-Lin Heng, managing director at Eastdil Secured, said sellers and buyers generally are only as good as their last sale or acquisition.
“Credibility and reputation both follow you, and you have to follow through on what you say you will do,” Heng said.
Panelists noted both stamina and trust are key components to getting deals to close.
Panel moderator Christian Mole, associate partner, transaction advisory services, United Kingdom and Ireland, at business advisory EY, said the one thing everyone must remember is that “it is a very small industry with a long memory.”
Gary Jones, COO of Aprirose Real Estate Investment, agreed.
“If we give a number, we stick with it. That can sometimes lose you a deal, especially when deal fatigue kicks in,” he said.
Joanne Owen, partner at legal firm Proskauer, said lengthy, in-depth negotiations often take a toll even when both sides come into discussions having done their research and with a firm grasp of pricing parameters.
“Some processes require incredible effort, but all buyers would have had some debt at some point, and the tension often comes in when the seller wants to test the market perhaps a little too much,” she said.
Both sides now
Consultants can help take a lot of and off the load, said Sylvie Chan, mergers and acquisitions director for Louvre Hotels Group.
Consultants with more of a helicopter view can bring certainty and clarity to any situation, which “is money well spent,” Heng said, adding that prep work pays off.
“The best processes are when you are best prepared and can communicate, and when all the advisors are speaking to one another,” she said.
She said research should include getting to know who you’re dealing with and what they look for.
“Understand the key pressure points and prioritize them. Know which ones you can give in a little on. And speak to buyers to know what is important to them,” Heng said.
Most buyers have finite funds, which have to be budgeted on costs that do not only relate to the buy itself, so they will walk away if talks start wobbling, she said.
Jones said it’s easier to set money aside when there’s some level of commitment to a deal.
“No buyer wants to incur costs, and who does not love to have exclusivity? How much business development (money) have you spent on the first round? No one is going to spend £100,000, $200,000, unless that exclusivity exists,” he said.
Jones added he is not a fan of due-diligence reports. “There are things you can do that the buyer will get reliance on, and there are certain things the seller can do to reduce risk, so when (the negotiations) get to the final three, the final number will not move too much,” he said.
Owen said stress-testing every aspect of the deal and the capital stack is also an excellent use of resources.
The process can take time, but it is time well spent, she said.
“Some of these things cannot be done quickly, so you must add a time component,” she said.
Chan recommended keeping “a tight rein on the timetable.”
“We leave the technical aspects to the very last, but that might just be us,” she said.
Jones said he ultimately believes it’s important to not make life too difficult for those on the other side of the negotiating table.
“The buyer has the view that now is the good time to sell, while so does the seller, or they probably would not be there, so there is already a contradiction. I do not want to end thinking I have hammered the opposition … as no one will deal with you again. We all have families,” he said.
Deals need to be entered with the notion that both sides can win, panelists said.
“You have to consider both sides, and you have to expect that the buy side will get there as they have spent a lot of money,” Jones said.
Sticking to the truth is also key in building trust to get deals done.
“The worst situation is when we know we were being lied to. That, of course, goes back to the credibility of everything,” Owen said.
Chipping prices
A lack of due diligence can lead to a reduction in the price offered.
“Price chips often happen due to a lack of information in the first round. That ends with us being given a price target to go to the second round, so if any bad news comes in during the process or we find things in the business plans that are not implementable, well, those certainly can affect the price,” Chan said.
Many problems can be avoided in the process by being upfront on both sides, Heng said.
“You have to be upfront with what the problems are, and you have to have people who price those problems correctly. If technical studies are done, or if there is a drop in pricing, you have to have those discussions,” she said.
Owen said a trap door often opens in latter stages because of negotiators being too mindful of or presenting information within a competitive environment.
“Do not disclose something only at the last moment,” she said. “I have been in situations where if there had been education, it would have been manageable, but the hand grenade was thrown in too late.”
More severe price reductions come in when people start getting cold feet, panelists said.
Value can also be tied to the ability to keep operating teams intact following a deal.
“When we bought Q Hotels (in October 2017), seven of the management team said they would be leaving on completion. Some were shareholders and got a pay-out, although these are usually not enough to retire on. Mostly they are worried about their jobs,” Aprirose’s Jones said.
“Management can add value, so as an advisor you have to be conscious of that. Take time to see that the OpCo side of the equation is cared for,” Eastdil’s Heng said.
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