Working on buyers and sellers expectations enables both parties to access a negotiation area. Providing information and analysing critical factors is a must.

By Eugenio Micheletti* for staffingamericalatina

The Royal Spanish Academy defines “Expectations” as: 1) the hope of doing or getting something; 2) a reasonable chance for something happening; 3) the possibility of receiving a right, a legacy, a job or something, when something expected happens.

Expectations are built based on assumptions about what we think should be, according to the information we have, our values, what we have learnt and been taught. Therefore, they include a strongly subjective component.

Anyway, the concept is always linked to a reasonable chance of something happening, otherwise it would be a simple irrational wish or linked with faith issues.

As uncertainty rises, the parties also increase their expectations: the seller believes that his company is worth more, that the future will be brighter than the present, that he will be able to find more attractive buyers; while the buyer either looks for cheaper companies, or waits until the future becomes clearer.

In this context, M&A consultants must provide information about the market to both parties, including data on trends and opportunities, possible value ranges, and the possibilities of generating convenient alternatives, so that expectations can be linked to possible and probable scenarios.

What are the most frequent situations of “excessive” or unrealistic expectations?

We can frequently come across situations in which expectations have no basis: cases in which buyers with global presence and with a prestige that has market value, expect the seller to “pay for belonging”, decreasing the company’s value to an extremely low figure; investors who look for companies with financial needs, and expect shareholders to lower their pretensions way below the industry’s standards; businessmen who have succeeded in their organizations, and feel uncertain as to what shall happen if they sell their firm, or who have developed a management team that they overestimate, so they expect to be paid for their company a price that is quite above the market standards; there are other cases of family businesses that seek to add an elevated “emotional value” to the company’s price, exceeding the valuation standards.

The consultant develops relationships with different players in the industry, including sellers and buyers, as well as key players from the ministry of labour, federations and confederations, ILO, academic and training institutions, among others. He/she must focus on providing data and ideas that include every critical aspect: the company’s value, comparative assets of each company, technological and service trends, future selling and buying options, top management situations and management contracts of the target company, management autonomy levels, and several other strategic aspects that facilitate both parties accessing a comfort zone for negotiation.

Consequently, it is necessary to work with available information to reduce uncertainty and use every technical element available to base expectations and place them in a reasonable scenario.

In other words, the consultant must focus on “rationalizing” aspects that are subject of debate and turn subjective expectations into realistic ones. We must built expectations based on what can be, and not just on what we want them to be.

It is basic (and logic) that buyers seek to pay the minimum price in order to recover their investment in the shortest time possible; but there are other variables at play as well, such as the expectations of finding companies with good human resources and talents, proper information systems, implemented procedures, properly functioning controls, attractive customers, and other attributes that lead buyers to pay the fair price and not a low price.

Conditions offered to investors in receptive countries is another key issue, considering regulations, labour costs, the market’s flexibility, the situation with trade unions, and, most importantly, the size of the market and the penetration rate of the Industry. This is key information that consultants must interpret and communicate.

CONCLUSIONS

Every expectation has an impact of the Company’s Value for both parties. As long as expectations are based on technical and rational aspects, we will find the value that can be considered as fair, both for buyers and sellers.

For that reason, consultants play a key role in the phase prior to negotiation, as we provide information, interpret market data and develop viable and better options to satisfy expectations from both parties.

*Eugenio Micheletti is Director of Emerging Staffing Brokers – emicheletti@emergingsb.com