Africa Business Communities

Maria Auma: Negotiating to Close – Deal makers and breakers

According to the East African, in 2014 the value of private equity deals in Africa reached its second-highest level at US$ 8.1 billion since 2007 when it was at US$ 8.3 billion. This data was compiled by the African Private Equity and Venture Capital Association (AVCA) and showed a total of 983 African private equity transactions made between 2007 and 2014.

This brings to mind the question: “how do such transactions, or any transaction of significance reach financial close?” I had earlier on written a post about how to negotiate to close. However, now I realize that the more involved you become in asset finance and project funding, the more likely that the rules of the game will slightly shift. You get to discover new rules and unsaid truths that you as a business professional can only learn through experience.

The first and most important rule is to show respect to every party involved in the transaction because they all matter. Depending on the size of finance being sought whether private equity or debt financing, there are different parties involved. You will have the entrepreneurs themselves, the debt or equity providers, the financial analysts, the financial advisors to the entrepreneur and the brokers. Each of these parties contributes a significant role towards the successful closing of the transaction. Without the entrepreneur there would be no project requesting funding, without the financial advisor, the entrepreneur would probably not know how to structure his request in order to achieve attractive return on investment for the shareholders embarking on the investment venture, without the financial analyst, the debt or equity providers would not know how to validate the claim of the financial figures in the project proposal and of course the brokers work towards providing suitable and convenient sources of funding. And because every party is vital, each of them should respect the amount of input being made by the other. Respect shown assures everyone involved that they are aiming towards the same goal.

The next rule applies to property acquisition as much as it does to funding. Patience and stamina is paramount.  When intending to purchase a huge chunk of property that is going to be demanding of resources, don't expect to hit a home run on the very first try. In fact expect to experience multiple setbacks before you come home with the prize. The level of your success will depend on your commitment to following through. You need to want to close the deal so bad that no-one else could do it better than you. This applies to funding as well. You should not expect that the very first person you send out your proposal to will be cash out the money you need immediately. In fact, it is much more prudent to keep an open mind when sending out your project proposals to potential investors.

Understanding the sensibilities of every party involved is just as important. Invest some time in getting to know each one. After all you will be involved in this project for a substantial period of time, so it is important to get along. Find out how everyone functions, what drives them nuts and what they hope to achieve from the successful close. Keep all your senses alert. Knowing all this will help you negotiate better. It’s nice to come to the negotiating table knowing you understand exactly what each party wants out of the deal, and tailoring your pitch to address every need.

Take your time. You don't want to ruin a potential opportunity for you or your client simply because you are in a hurry to close the deal. In your haste, you may overlook vital pieces of information that may play a huge factor in determining whether the investment opportunity is indeed a good match for the company. Pay attention to all of the print, not just the fine print. Take at least a week to internalize the legal aspects and obligations required of both parties, and especially the penalty clauses in case of default. After all, the financiers are not easily letting go of their cash, so why should you rush to let go of your assets? Look out for the termination terms and conditions and have a lawyer read through the documentation before you append your signature. The mistake a lot of entrepreneurs make is rushing into transactions without understanding with clarity what is required of them and how the capital will be trickled down into operational expenses and income. Sure, you have a cash flow statement, but do you understand the value of the numbers in light of the finance you are requesting for? Remember, these are projects that will last not less than ten years, so it is imperative that the marriage arrangement has been carefully planned.

Lastly, as an extra two cents for closing on property, choose your timing carefully, but leave room for spontaneity. Keep an ace up your sleeves while showing all your cards. Define within yourself the perfect timing and climate to shoot for the closing pitch. You’ve been viewing this property for a while now, most probably a year if you’re serious about purchasing it and will undoubtedly know when the right time is to rein in. Remember to pace yourself. In fact, it is advisable to build up interest in the seller to sell from the buyer’s point of view, and then go cold turkey on him when the asking price set is beyond what you are willing to pay. After a month or two, return to the bargaining table and present your case again more aggressively. By this time the speculators will have fallen off the road side, and you will notice that the seller is more willing to negotiate on your terms because he/she knows how serious you are.

With these simple guidelines, perhaps we can have more sound investments within the East African region with entrepreneurs that understand their asset worth and how each party involved is pivotal to the success of projects.

Maria Auma is CEO of Blue Luxury Investments, Kampala, Uganda.

 

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