Take the range out of your deals
I was fortunate that two of my early mentors were master dealmakers. They had different styles and approaches so I learned an incredible amount from each of them. Before I met them, I’d never made an investment, acquired a company or sold a company. In the years since I met them, I’ve done a ton of each.
React to the following:
“We’d like to buy your company for between $35 million and $50 million.” That means $50 million to you, right?
“We’d like to invest between $5 million and $7 million at a valuation of between $10 million and $15 million.” That means a post-money valuation of $22 million to you, right?
Or what do you think when someone says “about $10 million” instead of “between $9 million and $11 million”?
Given the extensive negotiation theory that exists, I’ve never understood why people talk in ranges when they are proposing a deal. While I understand the hesitancy of many to put the first number out there, I’ve never understood why this often translates into a range. When you put the range out there, you are by definition showing your negotiation flexibility at the very beginning of the negotiation.
While I understand that some people will assert that the range softens up the first volley in a negotiation and also indicates what the negotiating range might be, everyone I know who is a strong negotiator ignores the range and views the starting point as whatever number is most advantageous to them. All the range ends up doing is reinforcing that the range-giver is tentative and uncertain about their starting position.
Now, let’s translate this into something useful for the entrepreneur raising money. If you tell me you are raising $3 million to $5 million, then I don’t really know what you need (or want) to raise since there is a big gap between the two. Instead, if you tell me you are raising $3 million, then I can have a discussion with you about how much I think you should actually raise. And if you have more demand than expected, you can always raise more.
So, before tossing out a range in any negotiation, think again about the starting position you are trying to establish.