Posts Tagged ‘Interest based negotiating’

LEGAL REVIEW CONSIDERATIONS in DUE DILENGE

Tuesday, June 29th, 2010

 

Last time we were talking about Financial Due Diligence and what it includes: Financing needs and terms, the Business Model and budgets and Compensation.  We will close with the legal review.

Legal Review—how is the company organized?  Is it a sole proprietorship or corporation? How much ownership is there above the 10% level? It is important to know how many key players you will need to consider. 

What kind of contracts are there and what is their duration?  This should cover both clients and employees.  Is there value in a long term contract with a client or is the contract about to expire?  How about employees?  Will there be a millstone with long term ramifications or are key players about to walk out the door?

The other side of the coin is the liabilities.  Is everything recorded?  Are there any potential landmines that have not officially been addressed?  Is there any pending litigation?

How is the company’s intellectual property valued and or protected?  This becomes a red flag if there hasn’t been any steps taken to recognize and further protect the value the intellectual property of the firm.  What type of documentation supports your findings of who owns what?  This is not an area to make assumptions.  This includes the ownership of the domain name. Are there any cease and desist letters or pending litigation?  Have there been settlements?  Those need to be reviewed.

 Finally, an accountant should render an opinion on the taxes.  Tax positions should be summarized for as federal, state and any foreign taxes.  Are there any carry forwards?  How is revenue recognized?  Are the taxes paid or are there liens?

Here is a link to an excellent article in Business Week:

http://www.businessweek.com/smallbiz/content/nov2007/sb2007115_311364.htm

If this seems daunting, it is; it should be.  The financial due diligence is the heart of due diligence. However, you are not finished.

Next time we will talk about the other parts of the due diligence process: Products, Customers, Marketing, Research and Competition and a few miscellaneous pieces.

By Mary Whetstine—financial analyst

Mediation – Often, People Just Need to be Heard

Tuesday, March 30th, 2010

 “Sometimes we just get lucky”

I was asked to facilitate the mediation of an internal dispute between one of the largest divisions of a company among the top ten in the U.S. fortune five hundred list and their joint venture partner in several countries in Europe. To give you a sense of scope at the time, this J.V. was the third largest foreign investor in just the nation of Poland. Their operations were reaching a stage of expansion and disputes began to arise relating to decision making, procedure, philosophy and risk tolerance.

Under normal circumstances I would have interviewed several of the executives from both corporations and those directly operating the joint venture to get a clear scope of the roadblocks from their varying perspectives. This would also give me an insight into, and connection with, all the parties and form a basis of initial trust in me, and the process. The largest company decided that they could handle that “minor detail”, had already done so, and sent me a digest of the interviews that outlined the areas of dispute. Three days later we were to meet. From these transcripts I learned a great deal about the differences of opinion they were encountering technically, but nothing of the personalities, emotional or cultural issues that were behind these differences.

Please know that I would not have recommended this type of process to anyone who genuinely wished for realistic, lasting and qualitative resolution, but I had agreed to do this for a colleague who was in a bind. This was shaping up to be like going swimming with shoes on.

The evening before the meeting I was graciously invited to dinner with the junior executives who had set this session in motion. As we spoke over dinner, I tried to find out as much as I could about the personalities involved and their histories in business and as people. This also provided the chance to see the thinking of these junior executives as a reflection of their corporate culture.

That dinner was the key to how the process would unfold. It seems that the joint venture partner was originally a refugee from Europe and had come to the U.S. with only the shirt on his back. He had developed his business to the degree that he could return to the place that had reduced him to a nearly sub-human condition as a major player with one of the largest companies in the world. For the folks who had brought me into the there were no issues beyond the “bottom line” in their perception of what was involved in the J.V. arrangements. At the end of the dinner I told my hosts that I would be setting aside a special time for listening deeply to the chairman of the smaller company and I wanted their cooperation and non-interference with that process. They agreed but said they didn’t see what that had to do with the issues.

We had the very restricted time frame of 8:30 A.M. until 4:30 P.M. with the top decision makers from all the parties. After the introductions and welcoming statements we moved on to hearing from the gentleman who started the smaller company. I prompted him with questions that might allow him to express his feelings beyond the issues and kept him speaking for over 35 minutes. By 9:45 A.M. he had been thoroughly “heard”. Suddenly, it seemed there were no real issues to be resolved from the past and we moved on to how they all might work in the future. Animosity was dissolved and creative approaches were generated through the rest of the day.

After the meeting my hosts wondered how I “divined” how to handle the situation. I explained that what was a business arrangement to them was almost like a firstborn child to the other side. The issues were not material but emotional and by addressing them in that fashion it was really a simple problem. I guess I could have kept the mystery by saying that sometimes we just get lucky.

 

“Listen or thy tongue will keep thee deaf.”  ~Native American Indian Proverb

Written by Richard Dash

Understanding the Cultural Matrix

Wednesday, March 24th, 2010

 

Here is a further example of the importance of the cultural matrix behind successful solutions and how assumptions can lead to a resounding failure

While in the Middle East, I was the personal business consultant to the chairman and CEO of one of the largest publicly traded development and construction corporations in Israel. My assigned task was to head a project that would help meet the housing needs of a massive immigration from the Soviet Union. Over one million immigrants would enter Israel, an increase of almost 25% of the population within a two-year period. That would be the equivalent of 80 million new immigrants coming to the United States within two years.

Virtually all building there is done with concrete and stone, both for exteriors and interior dividing walls. This is a tediously slow way of doing construction but was the norm throughout the region. The government was encouraging the use of rapid building techniques for both temporary and permanent housing for the new immigrants, in search of solutions to this urgent need. I was responsible for finding the best systems and sources internationally, negotiation of joint venture agreements with those foreign providers of materials and expertise, and establishing projects for the creation of many millions of dollars worth of homes.  

I had sourced and established cooperative relations with some outstanding firms including one of the largest building companies on the NYSE, arranged for the uniting of alien plumbing and electrical systems, substituted coating materials best suited for the harsh sun of the region, shifted roof vent systems among thousands of other details in the planning stages of a small pilot project of some ten million dollars. We had two rooms constructed as test models for assembly systems. The collective wisdom of our building engineering firm and our architecture experts were all satisfied and ready to go. The evening before our final meeting to launch the project I chanced to be in the test rooms while two of the workmen were cleaning up and overheard the following:

1st man: What do you think of this new stuff?

2nd man: I like it. It’s pretty and clean and all the corners are square.

1st man:  Right. I’m not used to everything level and square but that I can live with.

2nd man: You sound like there is something you can’t live with. What is it?

1st man:  Well, I wouldn’t live in it because (he said as he banged his fist on the wall with the      resulting hollow sound that comes from sheet rock) it won’t stop a bullet.

How close we came. All of us, with all our expertise and experience hadn’t taken into account the consumer and one of the most basic of their needs, culture norms and approaches. Our unexamined assumptions would have brought us to inevitable failure. Sheet rock construction for exteriors would never succeed in the Middle East. Although the immigration pressure was immense, permanent housing was and would be virtually all created from block and concrete. All the residents know that concrete will stop a bullet.

“Tell me and I’ll forget; show me and I may remember; involve me and I’ll understand.” Confucius

Written by Richard Dash

IP Interest Based Negotiations

Monday, March 8th, 2010

In a previous article we discussed Positional Bargaining Negotiating as a rather rigid position that a person takes on an issue – very linear, one-dimensional. It is most often very personal and thus filled with strong emotions. With Interest Based Negotiations the process is built around collaborative flexibility, with future relationship considerations. Through open dialogue, the negotiator will help the parties identify their specific, individual values, needs, desires, which most often are what has likely caused each party’s position. By understanding one’s needs as well as the other’s, mutual openness to bridges and paths are built between the persons of conflict.

Interest Based Negotiations

To illustrate Interest Based Negotiations, here is a recent case study. Dennis, after several years of building and growing a highly successful IT company made the decision to sell. The business had a strong documented cash flow history, strong growth opportunities in a solid industry, and was in a most favorable California life style location; thus, the seller was able to justify a higher multiple and asking price. In a rather short period of time Dan, a buyer from Ohio, decided to make an offer through Dennis’ broker to purchase; he was financially qualified, with good IT operational experience and skills to run the business, and Dan always wanted to live in this part of California. From the time the owner and the buyer met, there was an established trust and good chemistry. The owner accepted an offer that included an agreement for the seller to carry 10% of the financing. The buyer was able to acquire funding and a closing date was set. Then an unforeseeable event took place – a national lending crisis; the funding source changed their criteria for this acquisition and Dan no longer qualified. Dennis was upset that the buyer was no longer qualified to purchase the business. He was not about to lower the price of the business – this was his retirement. Now, after several months of tedious negotiations it was time to start looking for a new buyer. Dan was irked that Dennis would not even consider lowering his already “overpriced” business. Dan was equally frustrated with the funding source and was watching his dream of owning the business evaporate. The negotiator/mediator was able to ascertain that both men valued collaboration and wanted to see if the business relationship and deal could be saved.

Dennis’ Position: Get lending and pay me what I am asking or the deal is over

Dan’s Position: Lower the price so that I can qualify for a loan or I will find another business to purchase

 Dennis’ Interest: I want to retire; I wants to work with a buyer that I like and trust; I am willing to work collaboratively

 Dan’s Interest: I want to own this business/I want to live in California; I want to be able to afford the business; I am willing to work collaboratively

 Notice how the positions do not allow for negotiation or compromise, but when we examine the interests, both men have several interests in common. In this case they were able to agree that they wanted to work collaboratively and get a deal done. In a relatively short period of time,  Dennis was able to understand Dan’s sense of loss and frustration and Dan was able to understand Dennis’ retirement fears and needs. An agreement was reached where Dennis would carry a 25% note for Dan. Dan was then able to obtain funding from the same source with the new criteria and Dennis received his asking price. The transaction was completed and both the business and the relationship flourish.

 “So when you are listening to somebody, completely, attentively, then you are listening not only to the words, but also to the feeling of what is being conveyed, to the whole of it, not part of it.” Krishnamurti (Indian philosopher)