Deal-Making Strategies: Structure and Close Better Agreements
Deal-making is the art and science of structuring agreements that create value for all parties. Effective deal-making goes beyond haggling over price. It involves designing creative deal structures, identifying value creation opportunities, overcoming obstacles, and closing agreements in ways that set the stage for successful implementation.
The best deal-makers combine analytical rigor with creative thinking. They understand the financial and legal dimensions of deals while also understanding the human dynamics. They are patient enough to explore possibilities and decisive enough to close when the time is right.
Deal Design
The structure of a deal often matters more than the specific terms.
Creative Deal Structures
Standard deal structures work for standard situations. Creative deal structures are needed when standard approaches do not fit. Earn-outs, milestone payments, equity stakes, joint ventures, and licensing arrangements are examples of alternative deal structures.
Creative deal structures can bridge gaps that seem insurmountable when only considering standard approaches. If you cannot agree on price, consider an earn-out where additional payments depend on future performance. If you cannot agree on upfront payment, consider deferred payments or royalties.
Contingent Agreements
Contingent agreements make certain terms dependent on future events. If the merger achieves specified synergies, the seller receives additional consideration. If the oil price stays above a certain level, the royalty rate increases.
Contingent agreements allow parties to bet on different views of the future. They resolve disagreements by creating different outcomes for different scenarios. They require clear definition of the triggering events and the consequences.
Risk Allocation
Every deal involves risk. How risk is allocated between parties is a central element of deal design. Risks can be allocated through warranties and representations, indemnification clauses, limitations of liability, and insurance requirements.
The party best able to manage a particular risk should typically bear it. Risk allocation should be fair and should create appropriate incentives for risk management.
Value Creation in Deals
The best deals create value beyond what either party could achieve alone.
Identifying Synergies
Synergies are the additional value created by combining the parties’ resources, capabilities, or market positions. Cost synergies come from eliminating duplication. Revenue synergies come from cross-selling, new markets, or enhanced capabilities.
Identify specific synergies and quantify their potential value. These synergies justify the deal and provide the resources to make both parties better off.
Expanding the Pie
Look for ways to expand the total value of the deal beyond the obvious terms. Can you combine products or services? Can you share distribution channels? Can you collaborate on research and development? Can you cross-refer customers?
Every expansion of the pie creates additional value that can be shared between the parties.
Overcoming Deal Obstacles
Every deal hits obstacles. Successful deal-makers know how to navigate them.
Valuation Gaps
When parties disagree on value, several approaches can bridge the gap. Bring in independent valuation experts. Use objective criteria like market comparisons. Consider alternative deal structures that change the value proposition.
Sometimes the gap cannot be fully bridged. In these cases, parties may need to accept that no deal is possible or reduce the scope of the deal to what they can agree on.
Trust Issues
When trust is lacking, deals become harder to make. Build trust through transparency, keeping commitments, and demonstrating competence. Use escrow arrangements, third-party guarantees, or phased implementation to reduce trust requirements.
If trust cannot be established, the deal may not be viable regardless of the economic terms.
Closing the Deal
Closing is a skill that balances urgency with patience.
Recognizing Readiness
Learn to recognize when the other party is ready to close. They may signal readiness through reduced questions, acceptance of previously contested points, or asking about next steps. Pushing to close before readiness creates resistance.
When you sense readiness, test with a closing question: does this proposal work for you? Or, are we ready to move forward? A direct question forces a decision.
FAQ
How do I know when a deal is good enough? Compare the deal to your BATNA. If the deal is better than your best alternative, it is good enough. Perfectionism in deal-making leads to missed opportunities. Most deals can be improved at the margins, but the cost of continued negotiation eventually outweighs the benefit.
What if we cannot agree on price? Focus on value rather than price. Look for ways to increase the total value of the deal. Consider different deal structures that change the value calculation. Use objective criteria to support your position.
How do I walk away from a deal? Walk away respectfully. Explain that the deal does not meet your needs, but leave the door open for future possibilities. Thank the other party for their time and effort. A respectful walkaway preserves the relationship for future opportunities.
What makes a deal durable? Durable deals align incentives, allocate risk appropriately, are clear about expectations, and include mechanisms for resolving future disagreements. Deals that both parties feel good about are more likely to be implemented successfully.