Zone of Possible Agreement (“ZOPA”)

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What It Means

A Zone of Possible Agreement, or “ZOPA”, refers to a range of possible values between which two negotiating parties would agree to a deal. In the example illustration below, a deal can be struck anywhere between the lowest value (the Seller’s Walkaway Price) and the highest value (the Buyer’s Walkaway Price). Any price outside of this range will, by definition, lead to a broken deal.

Why It’s Important

A successful deal can only be made in the ZOPA. However, the simple example of a ZOPA on price illustrated above represents just one of dozens of structural elements arising in an Acquisition negotiation, each with their own ZOPA. Some of these elements are more important to any given party than others and different Buyers will have different walkaway positions for each.

If there is no ZOPA to be found, it’s better for both Buyers and Sellers to discover that fact early in the discussions, especially if the unagreeable element is a potential deal killer (meaning it is make or break for one of the parties). Through communication and relationship-building during the discussion and Due Diligence process, Buyers and Sellers should be working to develop an understanding of the other party’s relative priorities and walkaway position for the various deal terms. Perhaps the Seller is willing to be flexible on the overall Enterprise Valuation in exchange for a quicker close. Perhaps the Buyer is willing to pay a higher price in exchange for more Seller Financing. Understanding these differences will allow Buyers and Sellers to create more value in the deal that should ultimately benefit both parties.

Related Terms

• Acquisition

• Best Alternative To a Negotiated Agreement (“BATNA”)

• Enterprise Value (“EV”)

• Letter of Intent (“LOI”)

• No-Shop Clause

• Seller Financing

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