“A lack of imagination” – Killing a deal breaker

“Imagination is more important than knowledge” – Albert Einstein

There are moments in life when, for apparently good reasons, we may take a view on a matter that is so convinced, no other view can be taken. I previously took Aung San Suu Kyi to be an incorruptible champion of human rights and I’d have had great difficulty believing anyone who suggested otherwise. My view was backed up by her Nobel Peace Prize. Today, I am less sure.

Being dogmatically and unquestioningly convinced of one’s own view, and closed to other possibilities, can be a serious weakness in life generally, and in business. If you have spent a great deal of blood, sweat and tears building up your business and are now looking for an exit door, or perhaps identifying targets to purchase to help your business grow, it can be difficult avoiding affliction by an overdose of tunnel-vision. We can become so invested in our own view. It represents the reward we are due for a lifetime’s hard graft, or it realises the dreams we have planned for years. Our own expectations can leave us blinded to other possibilities.

Chess players cannot even commence a game without being well prepared to imagine and anticipate an opponent’s likely openings, styles, strategies and several next potential moves. You cannot play bridge without taking care to speculate what hand each other player may hold.

So then, if we are so careful to consider differing views and strategies in the games we play, why are we so susceptible to becoming trapped by our own preconceptions and expectations of a business deal, reticent to honestly interrogate our own view and to permit other views or other potential outcomes to matter? Closed from using our imaginations?

Those of us who are in the deals business frequently advise our clients of the pitfalls that can bring a deal to its knees. We will warn of how something like a lack of preparation or transparency or focus or realism…or a lack of good and timely professional advice, can bring months of hard work and costs to waste. Many issues will start to raise their heads during the due diligence process, but if the seller had been proactive in thinking what might prove to become hiccups early enough, before commencing the sale, these might have been identified and then addressed even before the business was brought to market. For example:

  • the seller hadn’t mentioned a litigation dispute;
  • there’s an issue with a key employee or minor shareholder holding the deal to ransom;
  • a regulator will not permit a change of control or a client will not novate a very valuable contract;
  • valuable IP is owned by a third party;
  • financial forecasts are over optimistic;
  • your chosen buyer did not have the funding it had initially said it had to buy and now hopes to defer and tranche payments; or
  • the buyer gets cold feet and wants payments to be subject to complex net assets adjustments to be made some time after the date of sale.

All such warnings are well made, but it is the failure at an early stage to consider and to imagine what matters could raise their ugly heads that will often at the very least contribute to those matters causing a deal to stumble, delay or to fail further down the line.

“Imagination?” you might say “…A lawyer, a ‘suit’ who knows more about rules and regulations than he does about enterprise, telling me to use my imagination. And what anyway does he mean?”

Often, the first question a good adviser will ask his client on a sale is: “Why are you selling up?” The better adviser will also ask: “Why do you think a buyer would be interested in buying?” The best adviser will additionally challenge you with the following question: “What is it about your business that could deter a buyer?”

In any deal, if you are selling, you have also to think like a buyer and if you are buying, you have to think like a seller. Even more than that, you must also try to imagine, free of the constraints of your own knowledge of the business, your own subjective expectations, (which are often heavily coloured by your own needs, plans or finances), how the negotiation is likely to resolve.

The following set of questions might be helpful. Let’s suppose you are a seller and that a third party is challenging your claim to own a database that an employee brought with them from a prior business. You have properly disclosed the issue to your chosen buyer at an early stage. Imagine:

What could the buyer be thinking?
Any well-advised buyer is going to make as much of the issue as it can to put pressure on your price and to talk up the importance of ‘credibility’ and ‘trust’ as they pertain to the negotiation as a whole. The seller needs advice to imagine what effect any such issue could have (and actually probably does have) and so to be better prepared to manage and allay the buyer’s concerns.

It can also happen that, in your desperation to sell and move on to new pastures, you undervalue your business and overrate certain issues, such as the database concern, and are too ready to concede a reduction of price to meet the buyer’s supposed exposure. You should be advised to be clear-headed and to suppress your own deflationary instincts.

What is the buyer really thinking?
We cannot read the buyer’s mind, so all we can do is imagine what the buyer is really thinking on the basis of the information known to us. Interrogate the issue properly. How substantial is it really? Is it historical or still relevant? If in fact the challenged database issue concerns something that has little relevance to your business and can be put to bed with little commercial consequence, you will easily be able to undermine the buyer’s attempts to inflate the importance of the matter beyond its true scope. If the issue remains truly substantial, you may need to consider withdrawing the business from the market unless and until a resolution is reached with the third party.

While you are dealing with the so-called ‘downsides’, don’t forget the upsides. Remember to imagine also what the buyer may be able to do with the business that you have lacked the resources or energy to do. Imagine not just present but future, the potential of the business. You can be sure your buyer is not just depending on historical results but is far more interested in its future prospects.

What would you do if standing in the buyer’s shoes?
Buyers are used to using time very well to exert pressure upon the seller. They will expect sellers to act with urgency in providing them with a signed NDA and exclusivity undertaking and in making disclosures, but then revert to the sluggishness of a sloth when it suits, such as when coming up with a bid price, knowing that their delay may suggest a cooling interest and put the seller on the defensive. Would you have acted any differently if you filled their shoes?

As difficult as it can be, the ability to try and see things from the other side of the table cannot be recommended too highly. Attempts to understand your counterparty’s dialects in negotiation will often enable better communication and a quicker resolution of any issues that might arise.

It is almost inevitable that a buyer is going to use any opportunity it can to put pressure on you as to price or as to timing and to leverage mole hills into mountains. That is what you would do if you were buying. If you are able, with your advisers’ help, to view things not just from a one-sided and blinkered orientation but with a more complete perspective, you will be far better able to control the negotiation and its outcomes.

What is the right view?
There are never just two sides to an argument or two positions in a negotiation. There are three. There is your view, there is the other party’s view but there is also the right one. The right view is not necessarily a compromise position somewhere between your view and theirs. Your view may, from the outset, have been the right one. But you have also to allow for the possibility that the other side’s view may commend itself once an issue has been considered honestly in the light of all relevant information.

If a shared position is reached with the other side that both parties can live happily with, the parties can be satisfied that the right view has been reached and the negotiation remains on course for a successful closing. It may sometimes be the fabled compromise but should always be the result of well imagined alternatives being honestly considered and interrogated.


Patrick McGrath

DMB Law Solicitors



© Patrick D McGrath 2017

Leave a Reply

© 2021 Evolution Complete Business Sales Ltd.

  Keep me updated

Dear visitor. Please subscribe if you'd like to receive updates and events on selling or buying a business

* we hate spam and never share your details.