Wise deal negotiation tips are all about getting the deal done and getting a signature on that contract. Learning how to do a deal comes down to focus and simplicity. If you want a good business outcome, work towards that goal. Don’t get distracted.
Your aim should be to efficiently and effectively get business deals done and to implement provisions that will cause the least friction between the parties as they work together to build their venture.
It is counterproductive to draft provisions that will only result in friction, discord and conflict. That is not how to do a deal. It is a pointless negotiation strategy. It will simply waste time, energy and resources that could be be more productively deployed.
However, some people do have a more aggressive approach to forming commercial agreements. Some prefer a take-no-prisoners approach to deal negotiation.
Beware of Setting Traps – You May be the Victim
A prudent approach is to draft the provisions of a Shareholders Agreement, or any other commercial agreement for that matter, straight down the line. Make the terms as fair and as reasonable as is possible in the circumstances. Sometimes, one-sided provisions can end up biting the party that does not expect to be the victim.
I witnessed an example of this a few years ago when a very one-sided Shareholders Agreement was put together by an investor who sought to gain an advantage over the existing shareholders. He came into the company at a time when there were severe cash flow constraints. The dire financial circumstances meant the other shareholders had very little bargaining power.
He used his advantage and insisted that a new Shareholders Agreement be formed. And he insisted that the new Shareholders Agreement include some very aggressive valuation terms. Put simply, he wanted to be able to buy out the other shareholders at a cheap price.
What he hadn’t anticipated was that he may be the party that was being bought out.
It was not a wise move.
Unfortunately for him, circumstances morphed over time, and a new set of conditions that he had never anticipated arose. Suddenly he became vulnerable. He was he was left in a weakened state at the time when he needed cash and he had to sell off his stake.
The Shareholders Agreement included a first rights provision which meant he had to sell to the other shareholders instead of an outside party. The valuation rules he had set down were binding and the other shareholders simply followed those rules. He lost out because of his earlier aggressive actions.
The others were well within their rights to apply the valuation methodology he’d demanded in the Shareholders Agreement.
He felt the outcome was unfair and the price was too low. He even tried to argue that the provisions should not apply to him in that way. It didn’t work, and his interest was acquired in accordance with the valuation formula he’d developed.
The sale at that price did little to relieve his financial position, and the other shareholders went on to commercial success.
I won’t labour the point. Suffice it to say, every provision put into a commercial contract is a two-edged sword. Without the wisdom of Solomon, it is best to exercise moderation and fairness as you never know how circumstances will change and which of the myriad provisions in a document is the clause that your financial future or destiny may hinge upon.
Here is an overview of some deal building tools that you may find helpful.
A Simple Solution – Make Provisions Mutual
There is a simple rule that can introduce fairness into most contractual terms: convert any provision that seeks to secure an advantage into a mutual provision.
Let’s consider an example where the other party drafts the agreement so that it has strong indemnity provisions. It is not uncommon to get the first draft of a contract with a solid indemnity being expected of the non-drafting party. There is often a striking absence of an indemnity flowing the other way.
The simple solution is to change the provision so that the indemnity is mutual. That means each party will then indemnify the other party to the same extent. In most cases it is hard for the other party to mount a genuine reason why that sort of provision should not apply equally to both parties.
It you use this tactic, they find it awkward to argue against a provision being mutual and still be able to confidently assert the fairness of their position.
This simple technique has solved similar issues in many contracts that I’ve worked on.
It is amazing how the other party suddenly sees “a better way” to shape the indemnity provision so that it no longer retains its sharpest edges.
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About Mark Toohey
