As the frenzied pace of a frothy market slows, there are fewer opportunities, and every deal matters
Posted on Conversation Starter: April 8, 2008 9:15 AM
During boom times, deal-making is relatively easy. A rising tide lifts all boats…and the knowledge that there are lots of opportunities out there makes some negotiators forget that the deal is a way to get value, not an end in itself. You don't have to look as far back as the excesses of Enron to find examples of deals not worth the paper they were written on. Consider the sub-prime loan debacle. Or think about private equity deals based on 5:1 leverage and lots of cheap debt. Or look inside your own business at the deals that looked a lot better on paper than they have turned out in practice.
During a downturn, things change. As the frenzied pace of a frothy market slows, there are fewer opportunities, and every deal matters. This tends to make sales and business development negotiators more desperate and anxious to close deals and hit their numbers. Those on the other side know this and take advantage of their new leverage. Negotiations become more difficult, and pressure on the deal makers to deliver increases. In a downturn, there will be fewer deals, so each must be done more carefully to ensure it actually delivers value.
We're not talking about the kinds of deals where you can just sign it, or click "send" and be done. Our focus is deals where after you sign there is still lots to do to realize any value and where you need the other side to work with you, exercise good judgment, and occasionally even do something not strictly required of them. For those who negotiate deals where implementation actually matters, during a recession what you can't afford is deals that fail. Here are a few ideas to help make every deal count:
1. Consult broadly: It is tempting, when pressing for a quick close, to limit those in the know. But when you can't afford deals that don't work, you can't afford to keep those who have to implement them in the dark.
2. Make risk management a joint activity: During difficult economic conditions, risk is going to be on your minds. But if you don't discuss it, constructively, as a shared business problem, you will either (a) ignore it, to your detriment; or (b) try to protect yourself unilaterally, by demanding all manner of indemnifications and limitations on liability (the top two negotiated terms, according to the latest survey of the International Association of Commercial Contract Managers). Together, you may find strategies to prevent the problem or to mitigate its impact.
3. Don't extract overcommitments: Negotiators often feel compelled to get whatever they can. In a downturn, your counterpart might be just desperate enough to promise you the moon and even agree to penalties for failing to deliver. But strong contract language doesn't actually get you the results you need. Good due diligence and insisting on realistic commitments is what pays off after the ink is dry.