Posts Tagged ‘Negotiation’

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

Financial Due Diligence – Beyond the Dream to Reality

Saturday, June 12th, 2010

 By Mary Whetstine

In our previous financial analysis article, Due Diligence/The Tool for Transparency, we discussed the necessity for due diligence for an investment or acquisition.  We are now going to examine the critical part of the process:

 

Financial Due Diligence

You now have made the decision to move forward with the strategic acquisition or selling of the company, the patent, the license, or the design that will take your current company to the next level.  This is where you go beyond the dream and the great idea. This is where we detach from the emotion and the energy and we ask” is there enough substance to last?”  Be prepared to do your research and know your company’s past, present and future,  because if you are to be successful with your capital requests, your private, closely held group will be turned inside out and inspected.

Financing needs and terms—why is the capital needed?  Will it be used for products or personnel?  A timeline needs to be established.  How does the funding need to flow, exactly how and when it will be consumed?  Is the company public or private?

Business Model and budgets—this may seem really basic, but know your cash flows.  What are your expenses and revenues and how they are affected by the capital? Prepare a balance sheet and detail liabilities.   Do you plan to hire people or buy equipment?  What is the burn rate?  Have your goals and objectives mapped out, short and long term?  How will the capital be used upon receipt and what is a one year milestone?  What will the company look like a year from now?  Prepare projections detailing scenarios for best, worst and most likely, include the dates and when you estimate you will break even.  Finally, what are your future funding needs and who do you see as a possible source for that capital?  What are the milestones that will have been achieved that will enhance your receiving that next round of funding?  Do not fall into the trap that by acquiring the funding you have just hit the lottery.  Demonstrate that the money will be used for solid enhancement of the business and not perks.

            Compensation—if stock options are used, know the vesting schedule as to how the plan dilutes stock.  If there are restricted shares, what are the details of the restrictions?  Determine how the founders, board and key employees are compensated and if there is a vesting schedule.

Without being able to answers these questions, there is no going forward because you don’t even know what you have, nor a justifiable value of what you are seeking to acquire or sell.  Without that full understanding of value, it will likely be a futile attempt to convince an investor that your company, the patent, the license, the design is a great investment.

Dear Reader: Can you share a financial due diligence experience that had either positive or negative results in the acquisition or selling of a company or intellectual property?

 

Next time we’ll finish financial due diligence by exploring some of the legal elements to review.  Then move on to the competition and marketing components.

DUE DILIGENCE/THE TOOL FOR TRANSPARENCY

Monday, May 10th, 2010

By Mary Whetstine 

Do you know what you don’t know when investing in or purchasing a business or Intellectual Property (IP)?  Few of us have walked the path of life when we have not made some type of investment or purchase in which we “assumed” we knew what we were getting, only to be sorely disappointed? Perhaps assuming because the higher price of the product or entity we were getting exceptional quality, or of the evil assumption twin, of “getting a deal” because we were paying “below market value”? John Ruskin, the 19th century English poet and social thinker was attributed to saying: 

There is scarcely anything in the world that some man cannot make a little worse, and sell a little more cheaply. The person who buys on price alone is this man’s lawful prey.” 

The research needing to be done is the due diligence.  When we are making significant investments (in these times what investments are not significant?), the dire need of examining the multiple layers of the deal or the IP product is critical. There are pitfalls of Due Diligence that can become a door or a window.  Does it impede or facilitate the outcome? You and your team need to know what you intend to purchase and why.  The real question becomes, ‘Is what you see, what you get?’   And how about what you don’t see on the surface?  What are the gems and landmines that need to be uncovered?   Is the value and the cost for the venture merited? 

That is the essence of due diligence.  Value and risk, the balance determines if and how much to invest.  Whether an individual, venture capitalist or investment banker, the questions need to be answered before capital is invested. 

Make the ‘No’ or ‘Go’ decision before too much time or money is spent.  Most deals do not make it beyond this exploratory stage. 

To the reader:  Can you share an experience where solid, Due Diligence has guided you and your team to a great decision, that might otherwise been catastrophic? 

 Over the next few weeks, we will be discussing the components of the audit process.

The next article in this series will be: — Financial Due Diligence 

 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

When to Consider Calling on an IP Mediator

Tuesday, March 9th, 2010

 

It seems that our businesses and organizations are experiencing the constant white water of change, conflict and uncertainty.  It is a time when the question is not if there will be conflict, but how businesses will respond to conflict.  A mediator can be useful resource to help businesses and organizations constructively confront conflict.  It is timely to work with a mediator to resolve organizational conflict when:

  • Important decisions or difficult problems are avoided because of potential conflict
  • Watered-down compromises leave everyone virtually everyone disenchanted
  • Split decisions stand only until an inevitable shift in the wind, taking the organization off course
  • Group deliberations focus is on speaking and complaining, rather than listening, collaboration and problem solving
  • Power plays and appeals result in an estranged work environment
  • Chronic and acute conflict within the organization limits its ability to serve customers and stakeholders or fluidly adapt to change.

 

What an Impartial Third Party Mediator Offers

 

While the primary focus of a mediator is conflict resolution, a professional mediator sees conflict as the catalyst for positive change within the organization and between stakeholders.  In addition to the collaborative resolution of a conflict, mediation also offers:

  • A structured process that promotes civility, mutual respect and open dialogue.
  • A shared understanding and appreciation of diverse perspectives.
  • Identification of practical workable solutions that address everyone’s needs
  • A shared focus on the realization of a desired future state.
  • An enhanced sense of commitment, accountability, partnership and esprit de corps.

 

How Business Mediation Reconciles Past Differences

Unresolved, conflicted and hurtful relationships in the work place have significant ongoing impacts upon a team and organization.  They are like a chronic illness, draining valuable energy from a work group or project.  The potential for negative ramifications outside of the organization are significant, as detrimental messages about the project, work group or organization spread as a part of the underlying turmoil.  The healing of existing wounds, restoration of relationships and moving forward on common ground are the key ingredients to reconciliation and positive change.  A business mediator plays a critical role in establishing a safe environment to come together reconcile the past and restore and establish new working relationships.  With a neutral third party professional facilitating activities and conversations that lead to understanding, parties take steps toward renewed working relationship in which they commit to working together to get the job done.

“Nothing endures but change.”

Heraclitus, from Diogenes Laertius, Lives of Eminent Philosophers
Greek philosopher (540 BC – 480 BC)

IP Facilitation: The Critical Awareness of Perspective

Monday, March 1st, 2010

 

Business negotiators and mediators all too frequently ignore the cultural and historical factors that are an unseen basic that make conflicts seem insoluble.

 

I was called to provide some facilitation and coaching for the top leadership of one of the largest paper manufacturers in the world. Getting communications to penetrate through this rather gigantic organization was a problem in all levels of the company from the Board of Directors through the structure all the way to general employees. We spent time over several days with the top management of the company sharpening individual communication capability and practicing the individual communication of a new corporate vision.

One of the participants in my group was responsible for the manufacturing units located in the former Soviet Union. This executive was an American and had been sent to get the manufacturing in Russia up to speed and standards with the existing global employee base. Between sessions he said that he could not understand why it was so difficult for policies, announcements and news in general to reach throughout the fifteen thousand employees for whom he was responsible. He spoke of all the technical approaches that he had taken and the lack of success he still faced.

My question to him related to the cultural norms that he was facing. When he asked for further explanation, I took him through an understanding of the Russian mentality under the Soviet structure. In that seventy-year period workers did not have great control of their economic lives and neither did their supervisors and “bosses”. Where someone in that situation could feel that they had control was in the area of information. The statement “Knowledge is Power” had a peak of reality in that culture. So now under a freer market system, the cultural bias is still to keep control through keeping information to themselves. It is that cultural reference frame that needs to change. Did the company reward for information transfer? Were bonus structures in line for those who got information to all their employees? Had this executive addressed directly with his direct reports the value he attached to this as a function of management?

Without understanding our own cultural reference frame, and the frameworks of those who are party to a negotiation or mediation, although we may be capable of dealing with the principal material points of a dispute, we may be headed towards a distinct lack of success in resolving the underlying conflict. We must always keep in mind that each party has a historical, cultural and psychological background that makes their perspective unique and requires a unique resolution matrix.

Richard Dash, Mediator & Facilitator

“We must not always try to plumb the depths of the human heart; the truths it contains are among those that are best seen in half-light or in perspective” Francois R. Chateaubriand (French author and diplomat, 1768-1848)

Alternative Dispute Resolution (ADR): Positional Bargaining Negotiation

Tuesday, February 23rd, 2010

In a previous article we discussed the concept of negotiation and defined it as a process in which the parties involved communicate with one another through a facilitator to resolve a dispute, consummate a transaction, or simply to reach agreement in order to create balance or clarity.  There are two primary styles that we are going to address, Positional Bargaining Negotiation and Interest Based Negotiation.   Today we will discuss Positional Bargaining Negotiation.

Positional Bargaining

To illustrate positional bargaining, consider an actual situation in which a partnership was ending.  In 1996 two young, bright and close friends Jason and Matt founded a software internet based company.  However, within months of the launch, it became apparent that their business and people skills, as well as their business philosophies were in most ways on opposite ends of the spectrum.  The business took off extremely well and they put their put their differences aside and took positions of simply accepting these differences.  Soon the business flourished and they enjoyed making the type of money that neither had ever even dreamt of.  Going into their fourth year, the day-to-day operations of the business became highly stressful for both Jason and Matt.  It was now reaching a point where it was having an effect on their personal production.  With professional guidance, both became cognizant of the dysfunctional nature of their partnership and how it was manifesting itself not only in their business, but also in their personal lives; it was at that point both agreed that it was time to end their partnership. Jason asked to be bought out so that he could start another technology company and Matt was in agreement.

Fortunately, aside from being savvy technology entrepreneurs, they also were also forward thinking when they started their partnership.  They had created a partnership agreement with their attorney, an agreement with an exit strategy.  As with many such agreements there was a buy-sell provision that arranges a buy-out; if one partner leaves the business, the other partner must buy him out.  This provision included a buy-out based upon a prenegotiated percentage of the business value.

The Bargaining

This was a 3 step negotiation.  First, was agreeing on a mutually acceptable non-compete agreement. Second, was agreeing on what firm would perform the objective Third Party Valuation.  The standard process for the valuation is for a qualified industry valuation expert to analyze the financials, market trends, industry trends and comparables of similar businesses in their segment of the technology industry.  A key component of the process was an IP assessment of their IT intellectual property for licensing, trademarks, copyright and a pending patent. The due diligence process was a main ingredient to forming a positive closure of Jason’s and Matt’s business relationship; a third party performed an objective valuation on their IP, which otherwise might have been an emotionally volatile situation. The final business valuation provided a specific range of value on what their business could likely be sold for in the current market place.   

In the first 2 steps, there were basic pragmatic decisions that were easily agreed upon.  The third step was the primary focus of this mediation.  In this type of negotiation, parties will often examine their strengths and weaknesses to establish maximum and minimum figures before going into negotiation.  During the course of the negotiation, both Jason and Matt went strategically back and forth on price, based upon their perceived value.  With outside, objective professional guidance, they both moved incrementally towards each other’s negotiated numbers to arrive at a mutually accepted figure. 

With the monies from the buyout, Jason was able to jumpstart his new endeavor and it has taken off nicely. One of the lessons that he learned from his business experience with Matt was the importance of creating a clear, consistent vision of who his company is and where he wants it to be.  With such awareness he was able to become a more effective and dynamic leader.

Matt continues to grow his business to new levels of successes.  He has been able to build an organization around a group of individuals who share a similar business philosophy and mind set.   He continues to make a very comfortable income and is having fun doing it.

Keys

The keys to effective and appropriate positional bargaining are:

  • An objectively defined sum or task that is being considered
  • Emotions and a continuing relationship are not important
  • No other underlying interests or outcomes other than money
  • Trust and flexibility are not likely or even possible

Summary

Positional bargaining is a very useful and effective tool in mediation when individuals have either prepared or anticipated for such mediation, or in situations where one party might be in a particularly strong position and simply wants to draw a close to the business relationship.  Most often, the preferred style is the interest base negotiation where parties are moved from rigid positions to a more flexible one, where both parties win. 

Reader, please share how you have utilized this method of negotiation to resolve business conflict and create your win-win solution.

“Everything should be made as simple as possible, but not one bit simpler.”

                                                                                                            Albert Einstein

 

Reader, what does the above quote mean to you in regards to negotiating conflict?

Next week: Interest Based Negotiations.