How to Negotiate with Business Angels

Professional negotiator and media lawyer, Clive Rich

In these difficult, recessionary times it’s become harder than ever for SME’s to raise money to finance their working capital and expansion.

Banks seem to be closed to business and institutional money is very hard to come by for small companies. So, potential deals with business angels represent a life-line for SME’s.

How can SME’s maximise their chances of closing deals with potential business angel investors? One option rarely discussed is to improve their negotiating skills.

Negotiation is seldom taught or practised, and yet it has never been more important to be a skilled negotiator. So, when raising money from business angels, how can SME’s negotiate more effectively to get what they need?

Firstly, good negotiators bring an effective attitude to the negotiating table. Research shows that good negotiators feel positive about themselves, and believe that they can win. Having worked for many years with Simon Cowell – a winner if ever there was one – I can say that kind of attitude is self-fulfilling.

To be able to believe it can win, the SME needs to marshal its bargaining power.   Who holds the aces?  Un-trained negotiators often under-estimate the bargaining power they have on their side by focusing exclusively on the “market power” of the other side.

Yet there are many other sources of bargaining power – nine to be precise – including expertise, information, and access to influential networks. These sources of bargaining power are rarely distributed 9-0 in favour of anybody, so the SME needs to understand that and not be daunted by the perceived market power of the investor.

Secondly, SME’s need to know how to manage the negotiation process. Most negotiations follow a set pattern, with a number of recognisable and distinct stages. If you know what stage you are at and how to handle that stage then that will automatically give you a big advantage.

It’s often the early stages of a negotiation that get overlooked, because they require an investment of time. These include “Preparation”, and “Exploring “Needs”.  SME’s are always in such a tearing hurry trying to develop business and cash-flow that time spent on preparation can seem like something of a nuisance.

In fact it is an investment of time – fail to prepare and you prepare to fail. I have seen an SME fail to close a deal with an orderly and detail-minded angel investor by tuning up for the meeting wearing odd socks. If you don’t know what your deal partner expects from you then you won’t get much of what you want.

SME’s also need to take the time to establish the needs on both sides. Good negotiators know that you can’t expect to engineer a win/win outcome if this stage is skipped in the rush to get to the “haggle”. “Needs” are the underlying emotional requirements that each side has from the deal – not to be confused with organisational “wants” such as “price” or “quantity”.

These needs are critical to understand, because they underpin the whole negotiation, and yet they are often unspoken, so they are not easy to spot without a trained eye. Does the investor have a “security” or “reassurance” need?  If so they will be focused on guarantees and risk control in the deal. Do they need to achieve something unique as a result of the deal?

If so the SME needs to focus on the innovative and original nature of its product. Does the investor have a “belonging” need? If so the SME must be sure to make them feel at home as part of the company going forward.

If the parties can get through these early stages and bargain successfully they will arrive at the final stage of any negotiation, “closure”. SME’s need to know how fluid this moment can be. It must be bottled immediately before the investor changes his mind, is impacted by new economic factors, or finds something else to invest in.

I remember an SME failing to close its deal with an investor because it insisted on arguing about commitments for the next round of funding before the deal was closed for the current round.

Finally, SME’s need to grasp the importance of selecting the right behaviour   for the person they are dealing with and the right stage of the negotiation. There are 12 different negotiation behaviours to choose from, but most of us only use one or two – our favourites, irrespective of whether they are working or making things worse.

When seeking funding, much is made of the importance of the management team, the protectability of the product and the credibility of the marketing plan. SME’s should add the importance of negotiation skills to that list. It can be the difference that makes a difference.

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