Two men called me last September with a question: “We’ve been approached by a very large company. They want to acquire our company and they want us to set the price. What do you think we should do?”

Two hours later, we jointly decided that these two very bright men were not in a position to establish a value for their start up company. In this newsletter, I will tell you how we arrived at that decision.

Old Wives Tale

There is an Old Wives Tale that suggests that you never make the opening offer in a negotiation. You let the other guy do that. And, most of the time I totally disagree. There are several really good reasons to make an opening offer: 1) You set the negotiation anchor, 2) You establish the “zone of agreement”, and 3) You are more likely to end at a number that is more favorable to you than if you let the other guy set the number.

But in this phone call, I decided that the other guy was going to make the opening offer. Why? There were several pieces of information that we did not have, and therefore, we could not accurately set the anchor point. If we did, we would be negotiating against ourselves, and I HATE to do that!

Before you make the opening offer

Before you make the opening offer, you should be able to answer these questions. If you cannot, you must carefully consider allowing the other guy to make the offer.

• What is the market willing to bear for your service, product, idea etc? In this case, we simply had no way of knowing the answer. It was a seven year old start-up in uncharted territory. No one else was offering what these guys were.
• What is the value to the other company? Again, we did not have any idea what the company’s service offering could do to their bottom line.
• What is the company willing to pay for this service, product or idea? Again, we had only a guesstimate at best. No hard number.

What the owners had was a FEELING of what their company should be worth. And, that is not enough. What you feel is not good enough when you are negotiating a high stakes deal with a very large corporation. In the end, the three of us decided to allow the other company to make an offer to buy. After they made us an offer, we looked carefully at the financial analysis that supported their number. A short three months later everyone came to an agreement on the acquisition price.

I strongly suggest that you know the answers to at least one, if not two, of the questions outlined above before you make the opening offer in a high stakes negotiation with a sophisticated negotiation partner. If you do not know all three answers, let the other guy make the offer.

This entry was posted on Friday, May 2nd, 2008 at 10:18 pm and is filed under Tradeoffs/Counteroffers. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.