How do you negotiate in insolvency? We all know that negotiation is a vital skill, and effective negotiation is one of the most important aspects of an insolvency process, yet it can easily be overlooked as a key skill given the diversity of tasks that have to be mastered by the insolvency practitioner. In our experience, there are three main issues that come up time and time again when negotiating in asset sales: non-existent due diligence support; the potential for price chipping; and disruptive deal restructuring. Whilst these three main issues can complicate negotiations, we’ve gone over a few of the basics here to provide a refresher and to share our unique experience in IP asset sale negotiations.
Conventional Negotiation in Insolvency?
Negotiation, particularly in an asset sale, is popularly imagined (at least by the general public!) as a group of people in suits sitting around a table arguing until someone loses their temper and signs on a piece of paper. Further, negotiation can be seen as a game in which one side has to “lose” in order for the other side to “win”. Yet if someone loses, or perceives that they are the loser in a scenario, the outcome of the deal becomes more uncertain and problems are likely to appear at every opportunity as the “loser” is unlikely to be invested in finalising the deal. How does this work in insolvency?
Winner Takes All?
In truth, most negotiation takes place over the phone and the best types of negotiation and outcome involve “give-and-take” rather than a “winner takes all” type of strategy. If each party in a negotiation can walk away feeling like a winner, both are invested in the outcome and are likely to work to overcome problems rather than focus on the problems themselves. In an insolvency scenario where hidden assets or problems can come to light quickly, it’s important to be in a good position to be able to work with a party to overcome problems that do arise in order to maintain a deal. This usually means that both sides have to give up something in order to feel that the deal is fair to them, and crucially, both sides must recognise this.
For example, if an insolvency practitioner were selling IP assets in the retail industry (such as a brand including trade marks, some data, website and domain name) to a purchaser, the insolvency practitioner may accept the second highest offer if this is unconditional, payment will be received quickly and there is limited due diligence of the assets. In this scenario, the insolvency practitioner has given up the option of pursuing the highest price, and the purchaser has given up the option of extended due diligence. Crucially, both sides have also achieved a desired outcome – the insolvency practitioner has sold the assets maximising returns to creditors (given limited due diligence time and resource expended), and the purchaser can immediately use their new assets to generate revenue. In brief, giving something up in the short term can lead to the best possible deal for the assets.
If due diligence is not comprehensive or if damaging information is uncovered further on in the process, this can lead to price chipping by the potential purchaser or deal restructuring to take advantage of tax benefits, emphasising the importance of due diligence in any negotiation for assets.
The Power of Personal Relationships
But how do you know what the other party is willing to give up to get a deal done? Don’t underestimate the power of a chat on the phone! In insolvency scenarios, it can be difficult to know where the assets lie and information is taken on trust. When negotiating, it’s important to remember that the person on the other end of the phone is just that, another person. If you can build a relationship with your counterpart, any deal is more likely to complete with a successful outcome and repeat deals become much more likely.
But this is easier to say than to do – how can this be possible when insolvency scenarios speed deals up and time is of the essence? Put simply, it’s vital to invest the time or the deal might not happen! Investing the time in creating a personal relationship early on can be invaluable later, when the ability to understand what a purchaser or insolvency practitioner is looking to get out of a deal as well as their key objectives in the sale can be critical. This can be as simple as remembering that the other party likes golf or where they went on holiday, but it provides a platform for communication. Through building personal relationships, it is also possible to smooth over any problems that arise by having frank and honest discussions where both parties are acting in good faith, ultimately producing the best outcome.
What Do You Know?
To paraphrase estate agents, it’s all about the information that you can provide! As we’ve discussed, a key part of negotiation in an IP asset sale is information and access to it, whether this be in relation to interested parties, the assets in question, the market the company is in, or previous deals in the industry – the more you know about the case, assets and context the better off you will be at the negotiating table! In insolvency scenarios, this can be the difference between significant returns for assets versus limited returns. Reaching the right people at the right time with the right information can produce a great outcome that will enable the assets to be used going forward and potentially the rescue of jobs and business. Although creating a data room can be useful, this may be used better in conjunction with speaking to employees that were working at the company in order to see how the assets were used to drive revenue. This can help guide purchasers in when to think about the assets and the potential the assets may have.
To reiterate, the more you know in insolvency, the more you can do, and the less price chipping can affect the eventual purchase price of assets! Whether you are building the right relationships, finding out the most pertinent information or negotiating effectively to get the best outcome, negotiation is about communicating effectively. We’ll certainly be keeping our eyes out for evidence of great negotiation examples over the year to come!