What is a “good business deal”? Is it one where there is a winner and a loser?
Where we define the economy in monetary terms and in terms of scarce resources, then essentially we have a finite pool from which to draw. To simplify, if a deal is done by two players within an ecosystem, there are three participants in the deal – let’s call them buyer, seller and the market environment. Where we only consider the buyer & seller, you would be tempted to think that there must be a winner & loser. Where we include the environment around the deal, then both direct parties can win at the expense of the environment.
However, where a holistic and transparent view is taken of the needs of the three participants in any deal, then we start to conceive that it is possible for everyone to be a winner. To do this, we need to broaden our view on how a deal is defined, and lose the constraints of defining a deal wholly in terms of dollars in exchange for goods / services / etc.
Sustainability is a current buzzword, and I had an interesting exchange with an expert in the field recently. He spoke with me about an increasing awareness of the waste involved in business failure. This expert started their career in sustainability at the very environmental end of the subject. Over the years, business continuity and company profit kept coming up as a roadblock to sustainable practice, with business failure creating points of genuine wastage.
It then follows that deals which are structured on a win-lose basis will increase the chances of the losing party heading towards failure.
So, now we must turn attention to the ‘how’ of structuring win-win deals. Essentially, that can only be achieved in the context of understanding what drives the parties to a deal. In turn, to understand what is really important to each party, there needs to be open and honest communication and a level of trust.
I have found in bringing deals together that polarized or adversarial positions can appear to exist. However, in peeling away the layers of the onion, often a deeper understanding of why a party has that imperative will reveal an answer that did not seem to be there.
All of that is quite esoteric. Let’s then try to make it more real, by using an example of how this might be applied in practice. The owner of a business wishes to sell and puts it forward that he wants $0.5m in return for a quick, clean trade sale. A potential purchaser wishes to buy the business, but sees value well below that level and needs a deferred settlement. On the face of it, if a deal comes together, it is heading towards a win-lose or, even worse, a lose-lose scenario.
We then start to peel away the layers.
It turns out that the vendor is putting their opinion forward because friends, colleagues and advisors have said that is the way to make sure you get what you want – a hard and fast position that deals only with the barest of elements. After lengthy discussion, and some failed attempts to bring a deal together, desperation starts to morph itself into trust and it turns out that (for example) cash up front is not really important, a holiday is needed, but other than that there is no dire need to cut ties with the business and actually one of the husband & wife ownership team genuinely enjoys the practical side of the business and would love to keep a hands on role, but has become tired dealing with staff and admin.
The purchaser, for their part, also having become more open through fear of loss, has admitted that the initial bravado around being able to turn their hand to anything was mostly show and that they have real reticence around the practical parts if the business, but believes they are highly skilled in running businesses.
We start to see a win-win emerge here. The exact shape of the deal emerges through discussion, but there is common ground discovered.
I see this pattern repeatedly. It is very common, but also understandable. As an intermediary, I spend a great deal of time trying to dispel common perceptions which can lead the players to keep their cards so close to their chests as to be entirely opaque. The best deals happen where the parties to the deal can find these 1 + 1 = 3 opportunities. It is not always possible, but it is certainly more common that you would think.
And so, where does our third participant – the external environment that the deal sits in – fit into all this? Let’s add a layer of real world complexity to the example.
The ideal scenario described isn’t quite as fictionally perfect as described. The parties can’t find quite enough common ground to get to the ideal outcome. To forge out a deal, unwittingly they decide to use the external environment as the loser. In this case, the seller ends up displacing one of the employees to find something to do post sale, the purchaser cancels a supply contract to lower the cost base of the business, substituting a lower quality input to production in order to justify the higher buy in price in his mind, with the thought that margins will improve.
The deal happens, but imposes stress on the wider ecosystem. Is this good business and is the outcome optimal? Well, it may be – as long as it was considered in the right decision making framework, then it may be the best outcome.
In this case, however, thankfully, the parties, their advisors and the intermediary have been willing to work on the deal in an open fashion. The deal was struck in a fashion that protected the at risk employee, the supplier agreed to work with the parties to develop a two tiered pricing structure that allowed the seller to join the new organization (after a good holiday) in a role that introduced a secondary product offering at a different price point in the market.
We then see that a win-win is possible. In this case, we add a further win to that sequence, as the deal becomes a positive outcome for those associated with the business. These sorts of deals are not always easy to construct, but they are robust. When the parties to a deal consider what they are trying to achieve in a broad sense, and consider direct and indirect impacts, the outcomes can be astounding.