FINDING LEVERAGE IN A MAKE OR BREAK SITUATION
Matters I take on often require skill in three substantive areas—mergers and acquisitions; deadlock resolution; and major contract negotiation. Recently I was asked to resolve what had become an urgent and make-or-break situation for a supplier with its fortune 100 manufacturing company customer. The supplier (I will call it SupplyCo) had more than 85% of its business with this fortune 100 (let’s call it OmniCo). Seventeen (17) years prior, SupplyCo had located its physical plant within a mile of OmniCo’s plant to serve OmniCo and had not diversified its customer base since.
I was very familiar with SupplyCo and OmniCo. Almost three years earlier, I negotiated a long-term master services agreement between them. At that time, OmniCo’s demands for continuous improvement and yearly cost reductions from its suppliers had brought SupplyCo to near insolvency. If SupplyCo could not then win significant price increases from OmniCo, SupplyCo soon would have been out of business.
In that prior negotiation, I was able to leverage the trust I built with OmniCo to negotiate substantial price increases under that new contract—price increases, I was told by OmniCo’s negotiators that were larger than they had seen with any supplier in their more than 15-year history with OmniCo.
With expiration of that contract now looming, I was approached again to negotiate the renewal of that contract. After spending some time with the owner and the on-site operator of SupplyCo, I quickly discerned that the rapport that had developed between the two parties in the prior contract negotiations was rapidly diminishing. I also concluded that the on-site operator of SupplyCo simply had neither the temperament nor the capability to navigate the onerous demands of doing business with a large manufacturer like OmniCo; and that any renegotiation of the contract with OmniCo would be neither fair to the owner of SupplyCo nor would a new contract resolve the source of the problems OmniCo had with SupplyCo. I therefore broached with the owner of SupplyCo the idea of instead selling his company, an idea which he eagerly embraced.
Knowing that the best buyer would be OmniCo itself, I nevertheless scoped, strategized and made some preliminary inquiries of companies that might have an interest in SupplyCo and the prices I thought they would pay. Armed with this information, I approached OmniCo with the idea of acquiring SupplyCo. The animosity that OmniCo expressed toward SupplyCo was simply astounding. Not only had there been several production delays caused by SupplyCo’s inability to deliver product on time— problems that had risen to a highest levels of attention within OmniCo—but there also was a feeling that SupplyCo had so frequently misrepresented and mismanaged its business and interactions with OmniCo that there could be no trust. OmniCo was actively developing plans to terminate its relationship with SupplyCo—-pursuing alternative sources of supply that, while more costly and more time consuming to OmniCo, were felt to be ultimately less burdensome on operations and the daily lives of OmniCo’s employees.
Something kept haunting me in my conversations with OmniCo, however. They seemed particularly concerned with the immigration status of SupplyCo’s employees. I knew OmniCo’s industry was in a secular growth mode, that OmniCo’s business was booming, and that OmniCo and their competitors were struggling to hire qualified skilled employees. Even so, SupplyCo’s employees were skilled in a process that required attention to detail and precise manual motor dexterity—-not the typical skillset of OmniCo’s employees—and their separate value was not readily apparent.
Determined to explore this idea further with the valuation expert, however, we together developed a model that divided SupplyCo’s labor force into different stages of expertise and determined what it would cost OmniCo to develop a similarly skilled labor force.
Developing that model for labor replacement in a context where time was of the essence to OmniCo was the key to justifying a valuation of SupplyCo that was a record-setting multiple of EBITDA and of Net Income and that was more than 3x the maximum value the valuation expert had said he would refuse to exceed.
We eventually negotiated a price that was about 90% of that built-up value with many other favorable terms included in the purchase agreement.
Our negotiation was a collaborative but intense one. In many ways, and by buffering and reframing the comments each party was making to me, I was able to help the parties act more as though they were entering into a partnering joint venture than as adversaries. We strategized together how best to verify the immigration status of the employees and SupplyCo took the initiative to assure that OmniCo was getting the primary benefit of what it sought in the purchase. We also provided mechanisms to assure the smooth transfer of operations to OmniCo and the effective integration of some proprietary technology. And we jointly discussed ways in which OmniCo could increase the productivity of the facility so as to assure that OmniCo had a healthy return on the price it was paying.
SupplyCo’s owner, justifiably, was thrilled at the price; OmniCo was very satisfied with the increased production and seamless integration of production that it was able to achieve in short order. (In fact, I was later told that OmniCo was able to move to a third shift at SupplyCo without losing employees or increasing employment and, by making other adjustments in the production cycle, almost doubled production—within 6 months of closing.)
And from the rapport that was built during the negotiation, post -closing, the parties were far better able to integrate their very different employee bases and operating cultures in a very positive, satisfying and expeditious manner.
This negotiation, in many ways, had attained a near-perfect conclusion. We together had reached a point where we felt any deviation from our final negotiated solution would have been more adverse to one party than would have benefitted the other party. Each party felt fairly treated, and, most importantly, each party felt the final outcome had overwhelmingly satisfied what turned out to be their true priorities in the transaction.
Case Studies
Emergency Room Physicians
business deadlocks
Emergency Room Physicians
business deadlocks
Emergency Room Physicians
business deadlocks
Emergency Room Physicians
2019-11-05
Renegotiating Contracts
remorseful buyer
Renegotiating Contracts
remorseful buyer
Renegotiating Contracts
remorseful buyer
Renegotiating Contracts
2019-11-05
Bitter Sale to Competitor
selling to competitors
Bitter Sale to Competitor
selling to competitors
Bitter Sale to Competitor
selling to competitors
Bitter Sale to Competitor
2019-11-05
Collections Case
raw refusal to pay
Collections Case
raw refusal to pay
Collections Case
raw refusal to pay
Collections Case
2019-11-05
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