HOW TO PREVENT THE BREAKING POINT FROM BREAKING THE DEAL
We’ve all been there. You and your team are working on a deal. Pieces are falling into place, documents are being reviewed, and the deadline is within reach. Then it happens. The breaking point.
Deal breaking points are inevitable because of the amount of time it takes for a transaction to be completed, leaving room for things to happen. External events – caused by macroeconomic events—can change the trajectory of sales, sabotage the credit markets, or throw a veil of uncertainty over the economy. Internal events—a key executive leaving the organization, a major customer expanding or shrinking its business, or discovery of a potential liability – are all things that can delay deals or crater them altogether.
When a breaking point occurs, that’s when the real work begins. There are ways to anticipate breaking points to prevent them and or mitigate any damage from ensuing. These include ensuring that the contract language is clear and unambiguous, using objective rather than subjective criteria if part of the deal is tied to performance, adopting a policy of full disclosure on all details of the transaction, fully understanding each side’s objectives and concerns for the deal, and preserving your leverage. One technique that has been successful with our clients is to maintain a short exclusive period and keep alternative buyers active and in the wings.
When a breaking point does occur, immediately grab control of the situation and stay involved with the deal. Identify the facts and assess the situation. Separate out the emotional component. Importantly, reflect back on the parties’ mutual interest in the deal. If you can understand each party’s mindset—and appreciate their mutual interest in seeing the deal completed—then you will have a better chance of success. It’s also important to remember that while all parties may want the transaction completed, they want it completed for different reasons and with different motivations. The owner may have an emotional connection to the business or be more concerned about non-financial issues, while the private equity firm will likely focus on returns. Meanwhile the commercial bank doesn’t want to lose money or damage its reputation. Another technique is to bring the parties together into a room, and lock the doors until a deal is reached. Often, a good six-hour face-to-face negotiation can save weeks – if not months – on a transaction’s completion. But don’t be afraid to say “pencils down” or walk away from a deal if a fair compromise cannot be reached.