Everybody talks about win-win negotiations and it’s a lovely idea, but for most SME;s, reality is a good deal more brutal than that in the real world. So, I thought I would write a short list of practical tips about how to survive real deals for my grown children. They might sound cynical, but they are born of 30+ years of business experience. They are not a full blown guide to negotiation and structuring deals, just a way to protect yourself as best you can in the world of business. Enjoy:
1) A contract is not worth the paper its written on. It’s like nuclear deterrence ‘mutually assured destruction’. Its purpose in reality is to align expectations at the outset and to deter (it won’t prevent) honest people from cheating. It won’t deter dishonest people because they are already dishonest. Real crooks understand the huge costs, effort and uncertainty of contract enforcement. So negotiate a contract but understand its purpose and its limitations.
2) No one has your best interests at heart except you and perhaps your partner. People talk about win-win, but even so people and corporations inevitably get greedy and resent your part of the profit over time, being generous early on just delays this. It can be a sensible thing to do if you aim to have a long term relationship but eventually people will resent your share, so bear in mind that you will have to keep justifying your cut, even if it’s written into the contract.
3) Do your own due diligence. Listen to what people tell you but then do your own independent research because people are often incompetent, always self-serving and have their own agenda. This also means monitoring deals and your bank accounts etc. yourself. It also sends out the right message to everyone involved in negotiations, you are prepared and check everything. This has deterrence value as well as giving you comfort.
4) Always be prepared to walk away from a deal if it doesn’t meet your minimum requirement. The desire to ‘do a deal’ is poison. When we are greedy we ignore evidence that flags concerns and we don’t listen to our gut instincts. If we are fearful i.e we need the profit, the more you push the further away a sale will go. Worse still, the other side can smell ‘desperation’ and will use it to their advantage.
5) It’s a common adage but true, if you can’t figure out who is the sucker in the room, it’s probably you. You need to work out everyone else’s motivation, then you have the tools to negotiate with. At the same time, if it’s not clear what they are getting or it seems very modest, then it should ring an alarm bell for you. It either won’t be sustainable or they are making a secret profit, perhaps at your expense. Incidentally, don’t think that investment bankers or brokers are on your side (even the ones you are paying), as a deal nears closing they become desperate to ensure they get their commission and will encourage you to compromise to make sure a deal is done. The lawyers and accountants who are charging by the hour, will also discover loads of ‘issues’ that need to be addressed. Don’t ignore these issues but evaluate them yourself and remember in the end it is ‘your decision’.
6) Evaluate the risk-reward ratio of every possible deal. Are you risking £1000 to make £50? Is that sensible? How much will it cost you if everything goes wrong? Can you live with that? There is no black and white formula to answer this, which is probably why they ignore risk reward ratios at most business schools. Every now and then, extricate yourself from the ‘deal energy’, go to a quiet room and ask your self ‘Is this risk-reward sensible?’
7) Just because someone is likeable or a friend does not mean they are good at what they do. In fact, some people try to cover up their lack of competence with charm. We often seek advisers we like or even do deals with friends, but make sure they can deliver what you want. We more often make assumptions about people’s skills and word when we like them.
8) Do not assume that people will do what they say they are going to do when they say they are going to do it. Most people don’t. Double check everyone has done their job. Don’t worry about being a pain in the arse. (This applies more to deals than to people you have trained as micromanaging can be a big weakness.) It sounds like a repetition in another form of point 3) and it is…..but it is vital so in the spirit of the point, I am repeating it!
9) A deal is not done until the profit is in the bank. Don’t celebrate too early. Many deals break down at the last minute, sometimes through incompetence, fund don’t turn up…etc etc. A game of football ends when the referee blows the final whistle, don’t take your eye of the prize early!
10) Possession is 9/10ths of the law. Because of the worthlessness of contracts in terms of cost of enforcement, try to negotiate so that you keep holdings ome the value (cash, land, stock, brand name) even if technically it is not yours. It puts you in a position of power if things go wrong.