Tag Archives: Negotiation

How Do You Manage Major Projects? Seven Points

Situation: A company conducts both engineering feasibility studies and development projects. These are high budget projects and must be managed diligently to prevent cost overruns. What have others done to assure that projects are planned and managed to budget? How do you manage major projects?

Advice from the CEOs:

  • What is the structure of most contracted projects?
    • Most projects are fixed price. They come from feasibility studies which are essentially “marketing” for future sales. Typical terms are 30% up front, with the other 30/30/10 upon achievement of milestones and completion of the project.
  • Get complete buy-in from the customer as part of the initial negotiation.
  • Stay ahead of expenses by billing in time to maintain positive cash flow from the projects.
  • Structure pricing so that custom work is profitable if the project mix is 50/50 custom vs. standard work.
  • Push-back if the customer wants to reduce project cost up-front.
  • Carefully document work papers – above what is required by the contract. Get buy-in for this in advance, during the initial negotiation.
  • Once the feasibility study is completed, revise the scope and deliverables of the work agreement based on findings from the study.
  • Separate the “concept” phase from the execution phase and charge a premium for the concept work.
    • Position this as a value to the customer.

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How Do You Guide a Company Through a Sale? Five Thoughts

Situation: A company was built on capital equipment complemented by annuity sales of supplies used by the equipment. The company is moving toward automation of technology and offshore production of OEM equipment. An OEM partner will take on the equipment side of the business and the company will focus on automated supply solutions with sales direct to the end customer. The OEM partner has approached the company with a purchase offer. How do you guide a company through a sale?

Advice from the CEOs:

  • It is important to determine the value proposition, both from the company’s standpoint and the standpoint of the OEM buyer. The company’s objective will be to optimize the intersection of these two views of the value proposition — to its benefit.
  • Look at current employees and the technology and determine what to do to preserve their positions and interests. This will become part of the negotiation, but it is essential to have a clear idea of how this meshes with the CEO’s personal priorities.
  • Look to outside experts for advice on exit and succession planning.
  • Determine the CEO’s vision and path of involvement up to the sale. This involvement is negotiable, but should remain consistent with the CEO’s vision during the negotiation.
  • What is the company’s patent position, and the value of the patents in terms of future revenue? IP produces a future revenue stream. Consider the valuation to be in the range of 4 years of IP value.

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How Do You Add a New Capability? Four Approaches

Situation: A CEO reports that customers frequently ask whether the company can deliver a service that isn’t current in their portfolio of capabilities. In a substantial number of cases, the ability to offer this service is a key factor in their choice of vendors. The company’s experience with outside consultants offering this capacity has been disappointing. How do you add a new capability?

Advice from the CEOs:

  • Reevaluate the company’s needs and assess whether these can be better meet by bringing this capability in-house, or by restructuring how the company works with contractors. Determine whether the latter is just a negotiation and contract / payment problem.
  • Take a closer look at how the company contracts and creates incentives for outside contractors. Do they have performance objectives written into their contracts that reward them for meeting contract commitments? Can they earn bonuses for beating contract deadlines or exceeding design requirements? Are there penalties them for missing key deadlines?
    • Is it clear whether contractors are missing deadlines because of the “creative process,” because they don’t use their time efficiently, or because they have other commitments that take precedence at the company’s expense?
    • If the answer is either of the two latter situations, then contract adjustments may work. Similarly, if they have an incentive to be more creative faster to meet a bonus deadline a contract adjustment could also work to the company’s benefit.
    • Another option in working with independents is to make it clear that the company is generous, but if the contractor does not meet deadlines, they go to the bottom of the list for future opportunities.
  • An option is to hire one specialist and challenge them to grow a practice within the company. This may mean that they have to do all tasks early on, but the potential win will be the opportunity to grow a significant business and hire a team to do the lower-level work under their direction.
  • Another option – bring on a creative problem solver with appropriate experience who can support the existing team, but who will have more flexibility than a pure specialist.

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How Do You Evaluate an Acquisition? Five Points

Situation: A CEO is evaluating an acquisition which could significantly contribute to his company’s financial position. Patented technology may add value to the deal. The founders of the acquisition target are willing to work part-time to facilitate the transition of their technology to the acquirer. How do you evaluate an acquisition?

Advice from the CEOs:

  • Set a timetable to close the deal or walk.
  • Two key factors in the due diligence process will be strength of the intellectual property and cost of the acquisition long term.
  • Another key factor to evaluation will be how this opportunity fits into the company’s larger financing plan. Currently the company is undertaking a financing round. How much will this acquisition contribute to or distract from the financing round?
    • If this is a primarily a value-add opportunity, will it add to the larger financing round?
    • Can the larger financing round be completed on time while pursuing this opportunity?
    • An option is to negotiate a white label agreement – an agreement that will keep the company in the game while completing the larger round.
    • If the founders are not amenable to a delay, what is the cost in terms of funds and effort versus the larger round.
  • The technology appears interesting, but the timing is bad given your need for the larger financing round. Here’s an option.
    • Go to the founders and start the discussion. Secure a license or hire their programmer. Let the technology go dark until the financing round is completed.
    • There is value here – but do this as a side focus if it’s not too expensive. Assure that the deal includes both rights and the underlying algorithms.
  • Delegate this to someone else in the organization. The CEO’s focus is the larger financing round.

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How Do You Respond to Unrealistic Demands? Six Suggestions

Situation: A tech company is having difficulty with a customer. Given three options – high quality, low cost and rapid delivery – the company can deliver any combination of two, but the customer wants all three. When the company asks which two are most important, the customer responds that they want all three. How do you respond to unrealistic demands?

Advice from the CEOs:

  • The Devil’s Advocate response to this question is to look at your processes. Is it possible to do all three, and if so under what circumstances?
  • Think from the perspective of the customer:
    • What will you need and when?
    • Integrate the customer into the decision process as much as possible.
    • Demonstrate where trade-offs exist, and work through these in binary fashion until you reach agreement on the scope of work, delivery timeline and price.
  • The challenges change depending upon who within the customer company you are working. For example, the engineers understand the challenges and complexity of the product in question. However, the purchasing agents do not necessarily understand the product, its complexity, or how critical it is to their final product.
    • In this case try bargaining with the purchasing agent – if the purchasing agent goes back to the engineers and gets their agreement that your company can change the quality or delivery spec, perhaps you can be flexible in your pricing. Put the ball in the PA’s court – but make sure that the PA knows that he/she will be responsible for any project delays for not giving you the order today
  • Use stories to set expectations – better yet, use stories, combined with metrics about the costs associated with attempting short-cuts to develop authoritative arguments in support of your position.
  • Create a User Guide for your customers – paper and web formats – to sell your story. Sell fear, uncertainty and doubt; for example, if the PA wants to go another route here are the potential costs in terms of time, market share and profits lost.
  • In particularly difficult negotiations, use the real estate mantra: Some Will, Some Won’t, So What, Who’s Next?

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How Do You Communicate a Company Sale? Six Guidelines

Situation: A closely-held, non-public company is in negotiation for a possible sale. The CEO seeks guidance on when and how to communicate this to employees. What event would demand communication? The CEO is concerned that if the sale falls through this may significantly damage employee morale. How do you communicate a company sale?

Advice from the CEOs:

  • The trigger point for any employee communication will be due diligence. At this point, you may have a serious buyer.
    • Going into due diligence, limit updates to those who will be involved in the process.
    • Most acquisitions do not go through, so a broader communication risks disrupting the company – unless you are very confident that the sale will proceed.
    • Prior to due diligence, there is no benefit to communicating any possible sale to employees.
  • What message do you deliver to those who will be involved in due diligence?
    • We are entering a due diligence. This is an exercise that we’re doing for our own education so that we understand the value of the company. This is just a drill.
  • Keep your eye on the business and don’t be distracted by the offer.
  • Have a good idea of an acceptable sale price.
    • For a company with intellectual property or significant assets, three to five times EBITDA is a good starting point – unless the sale is a strategic buy to the buyer.
  • A possible deal is often spoiled by terms and conditions that the buyer attaches to the deal.
  • One buyer (at any one time) is the same as no buyer. When owners get serious about selling the company they will need a broker to develop multiple buyers, to advise them through the sale process and to defend their interests.

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How Do You Introduce New Information into a Negotiation? Five Thoughts

Situation: A company is negotiating an agreement to resell another company’s software. In due diligence the company encountered a customer who was offered a single user license for the same software at one-third the price that they have been asked to pay upfront. What is the best way to approach the vendor for additional information without divulging the source of his intelligence? Does this change the negotiation?

Advice from the CEOs:

  • There is no need to divulge your information source. Just say that you have done some research and quote the price that you found. Ask them to explain this to you. See how they respond. This may tell you a lot about how they operate.
  • What rights do you receive under the arrangement that has been offered by the firm? What exclusivity and guarantees will they offer? Will they write these into the agreement? How will they handle direct inquiries?
  • Perform a careful financial analysis of the opportunity. Model the market and the full cost of sales that you will encounter. What is customer purchase behavior? Is it changing?
  • Counter the vendor’s offer to you with a pay-down option that pays the vendor more over time, but allows you access to the software without a substantial up-front payment. This limits your exposure if sales do not ramp as you anticipate.
  • Visit the vendor and sit down with the President. See how this individual responds to your questions. You may get a much better deal through this approach than through the sales team. You also may develop other partnership options that can benefit you long-term.

Key Words: Reseller, Agreement, Price, Software, Due Diligence, Negotiation, Research, Exclusivity, Guarantees, Direct Inquiry, Analysis, Customer, Behavior, Counter, Visit

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What Are The Key Factors to Negotiating an IP Acquisition? Six Considerations

Situation:  The Company is interested in acquiring either the intellectual property (IP) of another company or the company itself. The target is a minor division of a larger parent company. The CEO contacted the parent and confirmed their interest in a deal. What are the key factors to negotiating an IP acquisition?

Advice from the CEOs:

  • You need to assure your rights to both current IP and future enhancements. This applies whether you or the parent is the final holder of the IP.
    • Look for clear language as to what constitutes base IP, derivative IP and extensions of the IP. You want to preserve your interest in future derivatives and extensions that you create.
  • There is a material difference between your position and the parent’s.
    • If the parent retains the IP, they also gain certain rights to IP extensions based on the current IP. If you own the IP, their potential rights to future IP are lost.
    • If the parent feels that the IP has strategic value – whether or not they are currently taking advantage of it – this will be one of the more difficult aspects to the negotiation.
  • What options are there besides acquiring the company?
    • The parent can grant a fully paid license to the technology, with access to the people and assets, waiving residual rights to future IP extensions, and no restrictions on transfer.
    • Another option could be a one-time royalty fee that is a perpetual license.
  • Within your due diligence, try to get a sense of the parent’s motivations and concerns for entertaining your interest in the acquisition. This will help you to frame a deal that works for both parties.
  • If the parent has been an active licensor or seller of IP, look for lawyers who know the company. Try to secure one of these as counsel for your negotiation.
  • From a liability standpoint, it is better to buy or license the IP and technology than the company. Liability travels with the company. Part of your negotiation will be who inherits any carry-over liability.

Key Words: Intellectual Property, IP, Acquisition, Rights, Enhancement, Derivative, Negotiation, License, Royalty, Legal Counsel, Liability

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Gee, I Like Your IP! Let’s Talk: 3 Steps to the Dance

Situation:  The Company is moving from a specialty solution to a complete solution. They have identified a partner with intellectual property (IP) that will help them fulfill this vision. How should the CEO approach this company to access their IP?

Advice from the CEOs:

  • There are two aspects of any deal: technical feasibility that will produce value; and the emotional needs of the principals.
    • The technical aspects are the most straightforward and easiest to value.
    • Frequently, a favorable deal hinges not on technical feasibility, but on the desires of the principals and their ability to trust one-another.
  • If you are convinced of the value, you must convince the other party that their best option is to work with you. Then you can negotiate the specifics.
    • Sell your vision: the technologies together are much more valuable than they are alone: 1 + 1 = 5!
    • If control of the technology is an issue, you must negotiate an arrangement where they are comfortable with your control.
      • Do you and the other party have a trusted advisor in common or is there an individual who is respected by both of you? This person can help communicate your good intentions.
  • If your best efforts do not produce an appealing arrangement, your fall-back position may be a partnership. If the partnership is backed by modest investment with options for future purchase, this may be another way to for you to eventually gain control of the technology.

Key Words: IP, Intellectual Property, Negotiation, Emotional Needs, Feasibility, Deal, Partnership  [like]

My Worst Nightmare – Sell or Downsize? Fifteen Considerations (Part 1)

Situation: The Company is losing money and has been approached about a merger. The CEO’s ideal outcome would be to get cash on the table, integrate with the merger partner and continue business. The other alternative – downsizing – may hurt company morale. What are the best options available?

Advice from the CEOs:

  • The realities of mergers:
    • 70% of mergers fail, and the merger process often leaves founders with a minority stake in the company.
    • Experience of others with partners has been disappointing – better to control your own destiny.
    • Look at all alternatives before you jump into a merger. You founded the company and have brought it this far. The company will be a different company following a merger, and not the company that you founded or have led to date.
  • Message to your potential merger partner:
    • Be a reluctant bride.
    • “We are making improvements to return to profitability and I’ve joined a board of CEOs who are consulting me through the process.”
    • If the partner sweetens the offer to keep the merger on the table, make sure that you get 51% of the merged company and retain control of your own fate.
  • Reconsider downsizing – Others have found the downsizing experience wrenching, but with far more positive results than they expected.
    • More on this in the next ceo2ceos blog.
  • Summary: look more closely at your situation before your jump into a merger. If you can save expenses, return to profitability and stay independent you will be happier.

Key Words: Merger, Negotiation, Ownership, Downsizing, Mitigation, Layoffs, Profitability  [like]