Texoil Negotiation

Texoil Negotiation (Service Station Owner)

Jake Moroshek

Planning

        Value based pricing was going to be the key, I thought, from the moment I looked at the Texoil case as the service station owner. From my perspective, the owners not only owned the station, but had acquired a loyal customer base. They had knowledge of the regional environment. They themselves were part of the reason the station was successful. My contention was that if Texoil built a station without them, it would be both risky and potentially unsuccessful. Based on the above value analysis, my partner and I decided that the total value of the station was: the cost of a new building for Texoil plus lost revenues during construction plus the lifetime value of previously acquired customers plus the risk reduction of a failed venture – a total of two million dollars.

        We knew that the above figure was quite high, and we planned to come out quickly and anchor the discussion there with our supporting evidence.^[1] Since the preliminary analysis showed it would cost Texoil 650k to build and 553k was our minimum desired selling price, our goal was to walk away with any deal above 650k. I was open to thinking creatively about a deal that was not all-cash.^[2]

        We recognized quickly that our BATNA so-so. If we sold for 400k it might be enough to pay for the sailboat, but it would not be enough to live on later. However, we realized that even in this worst case scenario, the boat could be sold upon returning in order to finance subsequent expenses. It wasn’t perfect but it was palatable. Ultimately, a deal that beat 400k would also work, but it would be leaving value on the table.

        Looking forward to the negotiation, we knew the Texoil rep would remark on the fact that we had been running ads in the newspaper. We felt that this was a disadvantage as it made us look desperate to sell. We wanted Texoil to think our BATNA was not only another offer but also continuing to enjoy running the station. The concocted story was: we started running the ads after we got an ‘out of the blue’ offer by a large competitor. We were SO surprised by this generous offer that we decided to go fishing to see what other interest was out there, though we had by no means decided that we wanted to sell.

Process

        My partner and I as well as the Texoil rep spent some time getting acquainted and exchanging pleasantries. Relationship building before a negotiation is a key to successful outcomes.^[3] He asked us why we were selling, and we trotted out our planned back story. A silence came over the discussion, and my partner proceeded to share our estimated two-million-dollar valuation. The Texoil rep’s brow furrowed, he scribbled on his paper, and said that based on his analysis he could offer us 200k! I was taken aback. My first instinct was that he was re-anchoring low. For most of the subsequent negotiation I felt he was playing hard ball.

        I countered by returning to the value discussion. I elaborated once again about how starting a gas station in a tough region with plenty of competitors was not a slam dunk; that there was a risk of failing, and that was the reason to pay a premium. The Texoil rep nodded his head and said, I still don’t understand how you’re getting to two million.

        At this point, I realized we had been doing too much talking, and potentially giving up too much information. We hadn’t asked why Texoil was interested, what their assumptions were, what they were looking at? Not letting the opposition speak was a blunder. Unfortunately, however, the rep didn’t give much information away.

        I redirected the conversation. I said, “our data shows it would cost you at least 650k to build, plus the customer base.” So how in the world are you getting somewhere between 200k and 300k. This was a smart move, because it got him to acknowledge that indeed the price to build was 650k, but that was for a new facility, potentially with the convenience store. I said sure, but then you’re going to be competing against me, and you’ll lose. Clearly existing relationships matter. He said price matters more. We went back and forth a little. At this point, I introduced the idea of us having a partial stake in the gas station. The Texoil rep seemed to be more ok with that idea, but the percent was still low.