This is essentially where the aspiring entrepreneurs get to put their management
skills [unclear], so as CEOs of these acquired businesses they will be trying proliferation
activities, increasing operational efficiency. One would think that it's always good to buy
sort of a highly valued and high growing companies and be the CEO and owner of
a unicorn or highly skilled technology value, or software as a service. However, this is
not what the program is about. You actually, the speed [unclear] is more in the
boring end of things, so you want to have a company which is relatively inexpensive,
in addition to this, potential like-so-on effects of the of the market in general.
Hello, this is Sami Miettinen. I run this channel called Neuvottelija, or Negotiator, and in this
episode I show how to negotiate an acquisition in a TrueNorth program, entrepreneurship through
acquisition. My hosts Gautam Basu and Mikko Järvinen, who will first explain the ETA concept, and
then I will demonstrate how negotiations can be used to acquire company at the reasonable
price, especially taking advantage the change circumstances in the current corporate finance market.
will go through a couple of basics in negotiation, first showing an evaluation and relative price
work and how a weak negotiation arc is formed, then I will go through a couple
of information gathering tactics and how to signal in negotiations. This will be later on
followed up with the rest of the training, where people have the opportunity to ask me questions.
some negotiations. If you're listening to this podcast, I would certainly recommend you watch
also the YouTube version of it, because of the slide I will be using throughout. Welcome to the
first ever TrueNorth Search webinar. My name is Gautam Basu and I'm the managing partner at True
North Search. We originally planned to hold this event at the Aalto Business School, but due to
the COVID-19 situation we decided to leverage the principles of agility and adaptability in business
operations, and we quickly adapted to the remote online format, which I think many of you have
already started doing, but that being said, I don't think this will detract from the value we'll get
today because we have an exciting presentation by Mr. Sami Miettinen from Translink Corporate Finance
on the topic of negotiation for acquisition entrepreneurs. Negotiation is one of the key
skills to develop if one wants to be successful in entrepreneurship through acquisition, from
negotiating a transitional service agreement with the seller, to negotiating the final purchase price
of a transaction. The art and skill of negotiation is a core competency for this career path, so we're
thrilled to have Sami present for us this evening, but before we dive into this exciting presentation,
a couple of ground rules. So number one, everyone on this call, please mute yourself so we minimize
all background noise, and number two is, if you have a question for the presenter, then please use the
chat function in Zoom to ask your question, and I will monitor the chat area during the presentation,
and then we can ask the presenter in a timely manner. With that being said, I'd like to turn
it over to my associate Mikko Järvinen, will give us a quick review of the ETA model for those of
you that may not be familiar with that, and once he's completed, then we'll turn it over to Sami.
So Mikko, the floor is yours. Thank you, Gautam. Just a moment, I will be sharing my screen for you, and
I think I have now accomplished that successfully. You see my screen, right? Excellent, good. So for you
that are first-time attending these, our events in general, or new to the entrepreneurship
through acquisition model, I have just a couple of slides to actually explain what all this is
about. So, uh, essentially entrepreneurship through acquisition isn't something very
new. Businesses have been traded probably for as long as there has been people around, but
this specific approach, this specific model of entrepreneurship through acquisition, acquisition
has originally developed in the US by a gentleman called [unclear] in the Stanford University in
mid-80s. Essentially, we see it as a career path where an aspiring entrepreneur can search for,
acquire, lead, operate, and grow an existing business. So essentially, an alternative to your startup path,
where businesses are created from basically zero. Maybe the one key aspect of the ETA model is
three main principles it has. So essentially, there are the jockey, the horse, and trainer. Jockey being
the aspiring entrepreneur starting the search to acquire an established target business. The horse
being an established business that is acquired, and the trainer, that can be an investor, advisor,
or an accelerator that is supporting the jockey of the journey. Traditionally, the jockeys have
come from, have been a freshly graduated MBAs, but more recently we have seen people more
experienced people taking this role, typically people with a long management experience, and
maybe looking for an alternative to the corporate life. The horses are typically companies that have
already existing revenues, cash flow, customer, suppliers, so something very different to your
startup world, and the trainer can be an investor, advisor, or in the case of TrueNorth Search, an
accelerator, which is there to actually support the jockey in order to fight them through the
pool horse and have a, what we would call, a good jockey-horse fit, to move on, develop that business.
So the four key steps of the ETA process. So as you can see, the timeline on the top row,
the whole duration for the ETA process is estimated to be something in between five
years to 10 years, and to get this started there are actually three main variations. There is the
[unclear] variation, where aspiring entrepreneur essentially raises funding for these [unclear] and
acquisition stage, so essentially project funding for the duration of 12 to 8 months, to search and
find an ideal target. Second option is the self-funded search, where the searcher covers those
costs out of his or her pocket, and thirdly there is the option of partnering up with
an accelerator, which can essentially help upon some of the resources that are needed for this stage.
A certain acquisition stage, that is something very, I would say, unique for the Entrepreneurship through
acquisition process, so what the searcher will do in this stage is that he or she will screen around
500 potential targets, meet sellers, conduct due diligence, arrange finance, negotiating approaches,
and acquires only one target out of those 500 potential ones, and the fourth stage's operating
[unclear]. This is essentially where the aspiring entrepreneurs get to put their management skills
in use, so as CEOs of these acquired businesses they will be trying proliferation activities,
increasing operational efficiency, and grow the revenue of the business, and finally there is
the exit stage. Typically some type of liquidity event happens in four to seven years from the
acquisition, and there are essentially two paths that can happen. The company can be acquired by a
third party, or if the entrepreneur decides, he can choose the path of recapitalisation, where he
essentially buys the investors out at this stage and may continue running the business for the rest
of his life, if that is what — what the entrepreneur is actually looking for. So I guess this sums up
pretty much the four steps of the ETA process, and I guess if you have some questions, please put them
on the chat, and maybe we'll come back to that the latter part of the presentation, but having
said this, I think I would be happy to hand over the presentation. [unclear]
So we'll — you can see, what — the share again? No — yes — presentation. There we go, very good, thanks
for inviting here. So I'm doing this pro bono, and my background is, I'm investment banker.
I spent half of my career in London, 13 years in Credit Suisse and CB, and [unclear] Capital,
and then I have worked in [unclear] banking and corporate finance in in Finland, in various
institutions. Then, that's the sort of side [unclear] step I have. I have been the CEO of Nordic Trustee, which
[unclear] bondholders' rights in the Finnish bond structures. I have [unclear] from Aalto, and have
an MBA from USA, and why I'm here talking about the negotiation is because I have, together
with [unclear], published the book — oh, you know, [unclear] — which is because it's a
quite a short, a small market, it's the market leader in that negotiation literature in Finland,
and here are my [unclear], if you want to reach me out. So I was asked to discuss a couple
of key concepts in negotiation and how they tie up to this ETA model of acquiring business
and becoming the CEO. First of all, my day job is, I'm a corporate financier, and TransLink
Corporate Finance does mostly sell-side. There, many businesses, so we would typically be on
the selling side, whereas the participants in this ETA program would be buying, but from
time to time we do buy-side advisory, so I know the process and how the financing ties to it.
So those are the two areas of investment banking services which are relevant to the ETA program,
the buy-side M&A advisory and sell-side advisory, and if we go on to how those two services applied
to the ETA, first we have to look at the outside, the environment, and that's of course pretty grim.
So this is a timeline of the fear index of weeks, and this measures the implied volatility and the
options in the Chicago Board of Options, and we have passed the previous all-time high peak at
2008, when the Lehman Brothers collapsed. So this is a similar-magnitude event we are witnessing,
COVID-19, and that's of course pretty bad news for most of the humanity, but this could actually be a
pretty good [unclear] point in time to look at this ETA model, because asset valuations are down,
and at some point they will obviously go up, so it's a good, good point to start.
And if we, in general, one would think that it's always good to buy sort of a highly valued and
high-growing companies and be the CEO and owner of a unicorn or highly skilled technology value, or
software as a service. However, this is not what the program is about. You actually, the speed spot
of acquiring companies is more in the boring end of things, so you want to have a company
which is relatively inexpensive, in addition to this potential like-so-on effects of the of the
market in general, and you might also want to push down the price with these levers, which discount
the price further: illiquidity, no control, lack of governance, and value leakage, and the other [unclear]
so if you do this right you can have the possibility of getting into the business at the
low point, at the discount, and then you can exit at the more [unclear] times, utilizing the
premiums available in the, when the market recovers, but just as a reminder if you're looking to do
this program to buy the next Supercell, this is probably not for you, and I, an example how people
value companies. They look at the enterprise value over EBITDA. This is [unclear],
[unclear] a multiple, which means that how many times the value of the acquired business is
a multiple of your current cash flow, and as we can see in this picture, in the engineering
sector, of big blue-chip engineering companies in the Nordic area, the [unclear] typical multiple has
been something like 10 times or even over it, and now it has collapsed here, in the, in the current
environment, and this is quite important, because this determines your entry point. If you end at
the low multiple and exit in the high multiple, that's good, otherwise then you have to, of course,
improve the profitability to fight against this, the dropping multiple, so it's a good time
to do deals, probably pretty soon. Of course, if the market keeps going down, then that's, that's
still bad timing, but we don't know really, and here's the data, as a part of this program you
would be looking at the numbers like this, and in the engineer sector you would look at not only
the relative valuations, but you would look at the sales growth of the sector, the profitability of
the sector, and then you would look at the sort of a smaller, much smaller than this actually, of
the market, not the big ones. This is the enterprise value, Atlas Copco has an enterprise value of [unclear]
thirty-four billion euros. Obviously this program is not looking after by Atlas Copco, and it's not
even looking at the [unclear], but they're small, much smaller companies. I think, Gautam, you
mentioned that this [unclear], something like a couple of million euros to twenty million
euros, if that's right? — That's correct. And then you look at these discounts, which I mentioned in the
previous slide, to sort of enhance your entry point, buy low, sell high. Okay, now we move to
the negotiations, so this is a negotiation theory. My fear is that amateurs operate in sort of
a narrow corridor of giving up. This would mean that you're basically a too-nice guy, you give up
anything that the other guy does, and then if you are then a tough guy, you go for competition
mode and try to sort of capture all, all evaluate yourself, and leave nothing to the other, poor, guy.
And then you might hug all, and yet go something in the middle, but that's bad, that's, that's an
even negotiation, a sort of master negotiator looks at this completely differently. Say, you either
do this classic win-win, so both parties win big, or, which is equally important, you do 'no deal',
and both look for a better deal elsewhere. Of course, it's provided time-appropriate
to these outcomes, but as a mindset you shall try to structure a mutually satisfactory deal, or then
you pretty quickly look for options outside the theater, had the play, and as a sort of, if you're
interested in how this is done, on the exit market, there's a pretty good Finnish book, 'Exit', which
has 15 stories, or half, successful entrepreneurs who have sold their companies, or listed them, or
otherwise exited. Incidentally, three of the deals are TransLink Corporate Finance deals,
shown here, and also both authors have actually exited their businesses, [unclear] and
the [unclear] group, with our help. Then, if you look at how a typical bad negotiator works, this
is the sort of caricature of negotiation, and when you don't know how to negotiate, you first look at
what to do before you enter the negotiation, at off the table, we call it the dialogue-planning phase,
and you are aided positively, the trust is here, positive, and distrust, this negative. You are aided
by your reputation, the references, hopefully you have good ones, they could be bad as well, if you
have a bad reputation, and then there's of course some kind of pre-meeting resistance, because people
don't know you necessarily before the meeting, you enter the negotiation without agenda, you somehow
scrape till a deal, you start doing the transaction, and you can see here it will go badly, and what
happens is, you, to first, called first impression, or you skip that altogether, you're being rude, you try
to then build a relationship and perhaps exceed to push the positive energy up, then you perhaps
go to this bargaining model like I showed in the previous slide, and then you maybe have a high
moment where there, the parties misunderstand the agreement and think they have a good deal, but
then that was all a fake, then time is running out, that's quite important, negotiation, you have
approaching panic, and you maybe want to do a deal anyway, pretty lousy deal, and once you
do a lousy deal, you have a declined trust carry-forward, but you essentially ruin your reputation, the
references, and you start from the bad foot when you do the deal, that's party again, or with the
sort of close circle of people, because people do tell about this, bad experiences, so don't do this.
Okay, what do you, what should you do then? You should first do a bit, like the previous slide, no agenda,
that's, that's bad, so do your agenda. Then you, you should obviously at some time, wisely, so you should
look at what you're looking at here. If you take the ETA program goals here, you are probably looking to
buy your company cheaply and buy a good one where you enjoy working. You look at what the other party
is looking at, they maybe want to get cash or some of the other benefit, to continue, good new owner.
Then you look at this win-win deal, like if you can do the combined deals where everybody
wins, and then you do quite a lot of this, like, if you have to walk away, what
would be the new [unclear]? Well, then this ETA program you actually do a lot of this, so you create a lot
of walk-away options, you look at the many, many new-partner options, so, so you sort of repeat this
circle with the ETA, and that from time to time you do this, compromises, that's a deal, but often
people don't do this, and the beauty of the ETA is you do create a lot of backup options, because you
keep repeating this process with the many companies. Then a couple of concepts I'm going
to talk about up later on, on this presentation. We defined four levers of negotiation, their power,
analytics, interaction, and principles, and here we define them, in the form of first splitting
the pie in the context, so if this is your pie, or cake, you have to split it, like, who gets the
benefit, added value of the deal, hopefully you'll get more of it, and this is your, just, power tricks
to, and negotiation handles, to achieve this. Then you have the analytical skills, you make a bigger
pie, you add elements to the deal which are not obvious, if you're smart and clever, and once you
have achieved this, pick up, how you deliver in negotiation, so the other party, even if they get
a smaller pie, they feel good about it, because here you are handling the social interactions well, and
then, of course, the reputation follows all through this. So if you're just doing this mechanically, and
then trying to sort of secure the other party than they are, you're not doing it right, so you
had to have consistent principles, how you negotiate, and how you build a reputation over time, so that
this cake-baking business is for the long term, not just one-off, and on these concepts, we have tons
of these concepts in our book, and in a negotiation training, we get through this ETA, but if we pick
up on it, there's quite a lot of power elements, by the way, I'm not going to cover them here today,
but you could use studies, ranges, and archetypes in negotiation, and you can use indirect power and
direct power to, to get forced decisions and walk away, but here we're mostly talking about the
analytics, so you have the time management is quite key, like how you handle the time element. I
touched upon the price earlier on, but there's a whole lot of stuff on the game theory and how to,
how to sort of find the best value in the deal. Then the interaction, I'm gonna talk a bit more
about that, so how you deliver your message, this is done through a process called signaling and
sharing the information, and then what's very, very important is the negotiation-team composition, and
with the ETA, you cannot get the benefit of the team, because we will be coaching, coaching, you
and this, this program, and then these principles, in the long term you need to have a reputation,
and trust and ethics and even algorithms, how you do things in a clever way.
Okay, so if you look at the signaling, so if you, you have to sort of get in the negotiation, you
had to acquire information, and you have to deliver information to the other party. So if you use the
analogy of Texas Hold'em, you have five open cards eventually, and then you have two in reserve, and
it's nice that they're aces, so you maybe win this one, but then there was an American, this is, this is
a foreign minister, I think Donald Rumsfeld, and he had this fantastically misunderstood
saying of the, 'no-no's', unknown unknowns, and basically that's actually a very smart speech
he had. So when you tried to figure information, there are things you know that you know, your
basic facts, there are things you know that you don't know, and then there are this Black Swan
territory, they're unknown ones, those things you don't even know, don't know that you don't know
them, and if you can uncover this Black Swan type of information, then that can be hugely powerful,
they can be like key negotiation levers. So if you know, for example, if you're trying to buy a
company, and then you, through method or through luck, you learn that then there is a certain
need for them to sell within a month, the business, and it's not obvious to everybody, this is, there's
this thing, by a kind of time pressure, then that's, that's an example of a Black Swan event which you
can use to your advantage. So, but then you signal that, this sort of open cards, in this ETA program,
you would say, be pretty open about that you want to acquire a company, you want a good one with
which grows and it's profitable and can disrupt the competition, and you, you want to partner for a
long term, so it's perfectly all right. [Music] Openly talk about this. What you don't want to
do, let's say this company's in the lovely city of Pori, but you, you and your family are in
Helsinki, so you don't want to move to Pori. You don't, you shouldn't be rude and tell that,
it's not, doesn't going to help anybody. Then if this is a really terrific company, you shouldn't
necessarily say that this is like the best of my options, and let's say that you have wasted your
time in this TrueNorth program and used your one year for doing nothing, and you have three
months left, then you should maybe tell that you have a time pressure of your own, but some people
do this much more aggressively, and just to give it, two guys who do this in the extreme here, [unclear]
[unclear], who's sold his bank, the Danish guys, didn't skimp on, for over, by signaling that
he wants to sell it for over 3.5 billion, and he got 4.1 billion just by saying that this is his
walk-away price. Elon Musk famously tweeted, well, why he was higher, or something, that this
Tesla's worth $420, your, $1 per share, and he, 'funding secured', for his arrogance, he was, he was
kicked out as chairman, [unclear], but you can, you're gonna make [unclear], do this even
with the public-listed companies, which [unclear]. So if you are a really powerful guy,
you can play outside this book, sometimes it's fails, and how to get the information actually,
trick is not to be a smart know-it-all. This [unclear] anybody, except, like, middle-aged guys
like me, know who this guy is, but it's Mr. Columbo, and beautiful candor, Columbo was a popular TV
series back in, like, ages ago, and the tactic of this detective was to play a really stupid guy
who just had a last question, who, it's completely nailed the criminal in the, in the show. So to get
the information, it's very good to actually ask questions, then, and say that you don't actually
understand this business, and you would appreciate any information they can give, and that's often
actually true. Hello there, my name is Sami Miettinen, and this was the excerpt from TrueNorth Search
ETA program, where I described, together with my hosts, Gautam Basu and Mikko Järvinen, a number
of topics on acquisition process. I will do a follow-up podcast which will cover such things
as team tactics, the optimal arc of negotiation, and how to close the deal. I will also answer
a number of audience questions. If you have been listening to this, I would strongly recommend you
will subscribe to my YouTube channel, Sami Miettinen, Neuvottelija, or search 'Negotiator'. Thank you.