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The Practice of Law

The Power of Walking Away

Herb Cohen, the author of ‘You can Negotiate Anything’ and once labelled ‘the world’s best negotiator’ tells a story about negotiating the purchase of his own house. Apparently, his family was so intent on acquiring this particular home that he feared being divorced and having his children never speak to him again if the deal did not close. As Herb told the story, since walking away from the deal was not an option, he was unable to negotiate even a nickel off the purchase price.

This story always resonated with me. When clients asked if I were any good at negotiating a deal, I would answer that it was up to them. If they were willing to walk away from the deal, I could be a fearless negotiator. If they were not, there was only so much that I could do.

I once acted for the sellers of a furniture manufacturing business. The owners were two gentlemen who I will call Sean and Jake. Each of Sean and Jake were in their mid to late seventies. Jake’s job was supervising the manufacture of the furniture, which required him to be on his feet all day making sure that the employees were working efficiently. Sean dealt with everything else.

The company was very profitable and had a great client base consisting primarily of large hotel chains. Sean wanted to sell so that he could retire and spend time with his family. Jake did not have much family left, his wife having died a few years earlier after many years of marriage. He was lonely and his job provided him with a social environment. He really did not want to sell at all. Neither of them felt that they had to sell but both were willing to do so if the right offer was made.

Along came some Americans with lots of money and a very favourable exchange rate, who wanted to purchase the business. They put forward a Letter of Intent with an extremely attractive purchase prince, probably intending to negotiate a price reduction based on supposed adverse findings in due diligence. I believe that the Americans were somewhat surprised that the business was as clean as a whistle. No red flags. No smoking guns. Nothing for a purchaser to hang their hat on and demand a price reduction. But they tried. They put forward perceived problems. My clients responded ‘don’t buy the business, then. We’ll keep it.’ This happened over and over. Whenever the purchaser identified a concern and asked for a price reduction, Sean and Jake replied the same way. They were perfectly happy not to sell.

As best as I can tell, the purchasers did not believe them. They thought that Sean and Jake had to sell because they were in their seventies, and Jake had some obvious health limitations which made it difficult for him to be on his feet all day. Maybe they were right, but nobody had told Sean and Jake.

This scenario had one more element which created an interesting dynamic, and that was the purchaser’s counsel who I will call Mr. Bomb (short for bombastic pain in the neck). Mr. Bomb was a very experienced, arrogant, annoying know-it-all who I had run into before. He loved to lead the parade and in this negotiation he just could not be in control, because Sean and Jake were running the show.

There were many skirmishes, and they all progressed the same way. Mr. Bomb would take some position. Sean and Jake would tell me to say no. Mr. Bomb would pontificate on how unreasonable our side was being. In thirty-five years of practice, he had never seen anyone take that position, yada, yada, yada. Then Mr. Bomb would announce that, whatever the point was, it constituted a deal breaker, resistance was futile and the purchaser would walk if we did not agree. I would request instructions. Sean and Jake would tell me to advise Mr. Bomb that they would just keep the company, and Mr. Bomb and the purchasers would then capitulate.

This went on for a while, but finally things came to a head when the purchaser insisted on a $1,000,000 holdback to secure the representations and warranties. Sean and Jake said that they had zero tolerance for any risk that they would not collect every penny of the purchase price and instructed me to agree to the holdback only if the amount was put into trust or secured by a bank letter of credit. Mr. Bomb had never, ever, ever, seen a vendor demand this. The purchaser withdrew from negotiations and Mr. Bomb told me that we had overplayed our hand and blown the deal, and that it was my fault for not forcing my clients to be reasonable. My clients were fine with this turn of events. They did not have to sell.

About a year later Mr. Bomb called me to say that the purchasers still wanted to buy the business and were willing to agree to our terms on the letter of credit. I spoke to Sean and Jake who said that they were just coming off of a great year and that the purchase price would be $2,000,000 higher. The purchaser now knew better than to negotiate and the deal got done with the higher purchase price and the letter of credit to secure the holdback.

All of which takes me back to what a wonderful negotiator I was, provided that my clients were willing to walk away.

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